Tax News

CCH (cch.taxgroup.com) reports:

  An IRS Appeals officer did not abuse his discretion in denying the application of Code Sec. 6621(d) interest netting in calculating additions to tax for negligence against an individual taxpayer under former Code Sec. 6653(a)(2). Although the addition to tax is calculated based on Code Sec. 6601 underpayment interest, and Code Sec. 6601 references Code Sec. 6621 in determining the underpayment rate, the underpayment rate, not the netted underpayment and overpayment rate, is used to calculate the addition to tax.

  Even if the entire Code Sec. 6621 is considered,
Code Sec. 6621(d) does not apply a zero interest rate but, rather, provides that the net rate of interest would be zero on equivalent underpayments and overpayments. Thus, the underpayment interest rate used to calculate the addition to tax does not itself become zero. Moreover, Code Sec. 6621(d) does not refer to amounts that are not interest, such as penalties or additions to tax.

  In addition, the IRS did not abuse its discretion by not offsetting the taxpayer's outstanding overpayments and underpayments, and properly applied the interest netting by decreasing the underpayment interest to equal the interest paid to the taxpayer on refunds for the overlapping period. Generally, the IRS has discretion whether to apply overpayments to delinquencies or to refund them. Also, the IRS would not generally use Code Sec. 6621(d) to eliminate interest rate imbalances if the differing rates had been eliminated through crediting because of a refund or tax payment. In this case, the IRS issued a refund to the taxpayer and paid him taxable interest on overpayments at the same rate at which the taxpayer was charged interest on equal amounts of underpayments during the same periods. Because the IRS sent a refund for the overpayments, with interest, and agreed that Code Sec. 6621(d) interest netting applied, the interest rate imbalances had been eliminated. Thus, the interest netting could be properly applied without offsetting the taxpayer's outstanding overpayments and underpayments.

T.I. Lincir, TC Memo. 2009-153, Dec. 57,871(M)

Other References:

 
Code Sec. 6330

  CCH Reference - 2009FED ¶38,184.60

 
Code Sec. 6621

  CCH Reference - 2009FED ¶39,455.38

  Tax Research Consultant

  CCH Reference - TRC PENALTY: 9,056.05
CCH Reference - TRC IRS: 51,056.25
   
 

CCH (cch.taxgroup.com) reports:

  David Axelrod, President Obama's senior advisor, indicated that the White House is willing to consider various proposals to tax health care benefits. However, he stressed that the president's proposal to limit the tax deduction for charitable contributions made by those earning above $250,000 remains "the best way to go."

  Axelrod, appearing on ABC's "This Week" on June 28, said there are "a number of formulations" in the health care reform plan so the administration will "wait and see." He maintained that keeping the legislative process moving along is "the most important thing at this point."

  White House Press Secretary Robert Gibbs, at a press briefing on June 29, said the administration understands that working with Congress requires flexibility and many participants at "a very large table" in order to make progress on health care reform. Gibbs, when pressed by reporters, did not rule out White House support for taxing health benefits but responded that the administration "will let the process work its way through."

  Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking member Charles E. Grassley, R-Iowa, on May 18 released policy options for financing reform of the health care system that contained changes in the exclusion for employer-provided benefits (TAXDAY, 2009/05/19, C.1). Proposals included capping the exclusion based on the value of a health insurance policy or the income level of the employee eligible for the exclusion, capping the exclusion based on both the value of the health insurance policy and income level, converting the employer-provided health insurance exclusion to an individual tax deduction or credit, and grandfathering existing plans so that benefits provided under existing collective bargaining agreements are not limited.

  By Paula Cruickshank, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Both Houses of the New Jersey Legislature have passed legislation that would, if enacted, increase the gross (personal) income tax rate and reduce the property tax deduction for high-income taxpayers and tax New Jersey lottery winnings in excess of $10,000.

CCH (cch.taxgroup.com) reports:

  After the Kentucky Legislature adjourned from its regular session without a final agreement on an economic incentives package (TAXDAY, 2009/03/30, S.14) and finally reached consensus on a package during a special session (TAXDAY, 2009/06/25, S.7), Gov. Steve Beshear signed legislation that creates and amends numerous credits that may be claimed against the Kentucky corporation income tax, the limited liability entity tax (LLET) and the personal income tax. The legislation includes new and amended credits for investment, job training, job retention, employer-paid tuition, first-time new home purchases, small business development, the film industry, and alternative energy facilities. In addition, all military pay received by active duty members of the U.S. Armed Forces, reserve members, and National Guard members, including compensation for state active duty, may be excluded from personal income effective for taxable years beginning on or after January 1, 2010. Provisions of the legislation that provide sales and use tax incentives (TAXDAY, 2009/06/29, S.11) and a pari-mutuel tax exemption for certain horse racing events and a motor vehicle usage tax incentive (TAXDAY, 2009/06/29, S.13) are covered in other stories.

CCH (cch.taxgroup.com) reports:

  The Connecticut General Assembly has passed a biennial budget bill for the period beginning July 1, 2009, and ending June 30, 2011, that, if enacted, would increase personal income tax rates, impose a corporate tax surcharge, decouple from the federal domestic product activities deduction, increase cigarette taxes, enact an estate tax surcharge, create a new tire fee, and make various other changes to the Connecticut tax laws as described below. Unless otherwise noted, all changes would be effective July 1, 2009, and apply to income or tax years beginning on or after January 1, 2009.

  Gov. Jodi Rell has indicated that she will veto the bill. The General Assembly has, however, sent Gov. Rell a letter asking for her support for the bill. The letter, signed by the Speaker of the House (Christopher Donovan) and the Senate President Pro Tempore (Donald Williams, Jr,), states that if Gov. Rell intends to veto the legislation, the General Assembly requests immediate bi-partisan negotiations between the Executive and Legislative branches of government. The General Assembly also suggests Monday, June 29, 2009, at 11:00 a.m. in Capitol Room 410 as a possible first session of negotiations.

CCH (cch.taxgroup.com) reports:

  The House passed the American Clean Energy and Security Bill of 2009 (HR 2454), a comprehensive energy measure designed to combat global warming by capping the amount of greenhouse gas produced by American businesses and consumers. The measure, which passed by a vote of 219 to 212 on June 26, includes few tax provisions since House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., decided against convening his committee to make changes to the bill.

  The measure includes a provision to modify the earned income tax credit by increasing the phaseout amount from $5,280 to $11,640 for taxpayers without qualifying children, effective after December 31, 2011. That provision was included in a 310-page amendment that Democratic leaders added to the bill in the early hours of June 26. The bill also includes a provision to allow the Treasury to transfer money from the general fund to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund to offset any changes in benefit costs and tax revenues caused by the energy measure.

  House Minority Leader John Boehner, R-Ohio, criticized the legislation, saying it allows the federal government to impose new regulations and programs that will drive up the cost of gasoline, food and electricity. This over-intrusive energy measure would drive millions of jobs overseas to other countries that have less strict environmental regulations, he said. Rep. Earl Blumenauer, D-Ore., said the bill puts a mechanism in place to rein in global warming and create capital that can be invested in renewable energy sources from the wind and sun.

White House

  President Obama hailed House passage of the energy bill, saying it was a historic action that would create millions of new jobs, reduce U.S. dependence on foreign oil and limit the release of dangerous pollutants.

  By Stephen K. Cooper and Paula Cruickshank, CCH News Staff

Tax Section of Amendment to American Clean Energy and Security Act of 2009, HR 2454

Statement of Administration Policy on HR 2454

CCH (cch.taxgroup.com) reports:

  Charging that the Obama Administration's economic stimulus bill has done little to assist small businesses, Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, on June 26 introduced legislation that he said would give those employers critical tax relief, allowing them to grow and create new jobs.

  "My bill will leave more money in the hands of small business owners so they can hire more workers, keep paying the salaries of their employees, and make additional investments that will lead to new jobs" Grassley said.

  Grassley's Small Business Tax Relief Act of 2009 includes provisions that would increase the expensing allowance from $250,000 to $500,000, allow more small C corporations to benefit from the lower tax rates for the smallest C corporations, take the general business credits out of the alternative minimum tax (AMT) for companies with $50 million or less in annual gross receipts, extend the one-year carryback for general business credits to a five-year carryback for small businesses, provide a 20-percent deduction for flow-through business income for small businesses, which are defined as flow-through entities with $50 million or less in annual gross receipts, lower the potential tax burden when a C corporation becomes an S corporation, and expand the net operating loss provision contained in the stimulus bill.

  By Jeff Carlson, CCH News Staff

Senate Finance Committee Release: Grassley Introduces Bill to Strengthen Job-Creating Abilities of Small Businesses
 

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Texas has enacted a group of tax incentives aimed at projects to capture and sequester carbon dioxide that would otherwise be emitted into the atmosphere, including a franchise tax credit, a sales and use tax exemption, an extended severance tax rate reduction, and new qualifications for property tax incentives under the Texas Economic Development Act.

CCH (cch.taxgroup.com) reports:

  The Minnesota Department of Revenue has issued an update regarding the July 1 sales and use tax rate increase that provides transitional provisions for various transactions. As previously reported, the general sales and use tax rate increases from 6.5% to 6.875% on July 1, 2009. (TAXDAY, 2009/04/10, S.16) Beginning July 1, the new tax rate of 6.875% applies to all taxable sales, including leases of motor vehicles. However, the new 6.875% rate does not apply to sales or purchases of motor vehicles that are subject to the state excise tax on motor vehicles. (TAXDAY, 2009/05/19, S.8)

  If an invoice or billing includes charges for taxable items or services for dates prior to July 1 and dates on or after July 1, the entire billing is taxed at the 6.875% rate unless the charges are separately stated for sales before July and for sales beginning July 1. When the charges are separately stated, charges for taxable items and services sold before July 1 are taxed at the 6.5% rate and charges for taxable items or services sold on or after July 1 are taxed at the 6.875% rate.

CCH (cch.taxgroup.com) reports:

  California Controller John Chiang has announced that unless the governor and legislature adopt immediate budget and cash solutions, beginning July 2, 2009, the controller's office will be forced to issue registered warrants, also known as IOUs, for personal income and corporation franchise and income tax refunds and all other payment categories not protected by the state constitution, federal law, and court decisions.

  The warrants will carry an interest rate set by the Pooled Money Investment Board. The controller has requested an emergency meeting of the Board on July 2 to set the rate. Any rate adoption will become effective immediately. The warrants will have a maturity date of October 1, 2009.

Press Release , California State Controller's Office, June 24, 2009

CCH (cch.taxgroup.com) reports:

  The IRS failed to take necessary actions to notify taxpayers and their representatives of Notices of Federal Tax Liens (NFTL) filed by the Service, the Treasury Inspector General for Tax Administration (TIGTA) concluded in a report released on June 25. In a separate report, TIGTA determined that the IRS is not properly monitoring Acceptance Agents who obtain individual taxpayer identification numbers (ITIN) for alien individuals.

Notices of Federal Tax Liens

  The IRS attaches an NFTL on taxpayer assets when it has a claim for unpaid taxes. The IRS filed over 700,000 lien notices for the year beginning July 1, 2007, and ending June 30, 2008. After filing a notice, the IRS must, within five business days, notify taxpayers of the lien in writing at their last-known address. In addition, if the taxpayer has an authorized representative on file with the IRS, the Service must notify the representative of the lien within five business days after notice is sent to the taxpayer.

  TIGTA is required to audit the lien program every year. In a sample of 125 cases, TIGTA found that the IRS notified taxpayers within five days in every case. In the previous year, IRS could not demonstrate timely mailing in 3 percent of sampled cases.

  Taxpayers had an authorized representative in 27 of the 125 cases, but the IRS failed to notify the representatives in eight (30 percent) of the 27 cases. While this error rate declined from 76 percent in 2006, TIGTA projected that taxpayer representatives may not have been notified in over 45,000 cases. At TIGTA's recommendation, the IRS is improving its processes for updating its records of taxpayer representatives and for notifying representatives of NFTLs.

  If the lien notice mailed to the taxpayer is returned to the IRS as undelivered mail, employees must research the IRS computer system within five days to check the accuracy of the taxpayer's address. In a sample of 283 undelivered lien notices, the IRS failed to perform timely research in 83 percent of the cases, compared to 33 percent in the previous year. TIGTA indicated that it found similar problems in the previous year and that the IRS had agreed to address the problem but, instead, the IRS's performance declined. The Service agreed to TIGTA's new recommendation to check addresses using the Automated Lien System.

  TIGTA identified 26 cases where the addresses on the lien notice and in the IRS system did not match. In 17 of the cases, the address was updated before notice was sent to the taxpayer, and a new lien notice should have been sent to the updated address. This created potential violations of taxpayers' rights because the IRS did not satisfy the statutory requirement to send the lien notice to the taxpayer's last-known address. TIGTA also determined that the IRS failed to enter appropriate codes in its records to reflect the status of the notices and to determine appropriate actions.

Acceptance Agents

  In the second report, TIGTA examined the use of IRS-approved Acceptance Agents to obtain ITINs for aliens. TIGTA noted that inadequate screening and monitoring increased the risk to taxpayers and the government of potential losses associated with unscrupulous agents. The auditor found that the IRS failed to properly monitor agents. Copies of green cards were lacking for 10 of 12 agents sampled, and required criminal background checks were not performed for 70 of 74 agents. Finally, the IRS failed to visit agents to check on their performance. The IRS agreed to correct these problems.

TIGTA Press Release: TIGTA Releases Audit Report on Acceptance Agent Program

TIGTA Report: Inadequate Management Information Has Adversely Affected the Acceptance Agent Program (Reference Number: 2009-40-087)

TIGTA Press Release: TIGTA Releases Audit Entitled, "Additional Actions Are Needed to Protect Taxpayers' Rights During the Lien Due Process"

TIGTA Report: Additional Actions Are Needed to Protect Taxpayers' Rights During the Lien Due Process (Reference Number: 2009-30-089)
 

CCH (cch.taxgroup.com) reports:

  Transportation industry experts and government officials told lawmakers on the House Ways and Means Subcommittees of Oversight and Select Revenue Measures on June 25 that the nation's transportation needs are dire and that the Highway Trust Fund is severely underfunded. Since Americans have curbed their driving during the recession, the trust fund is not collecting enough in fuel taxes to fund the current highway program, said Transportation Department (DOT) Undersecretary for Policy Roy Kienitz.

  DOT estimates that the trust fund will run out of money in August 2009. "We estimate that an additional $5-7 billion will be needed in the Highway Account to manage the cash flow and pay all of our bills on time through the end of the current fiscal year," Kienitz said. "And we estimate that another $8-10 billion will be needed to cover the anticipated cash shortfall in fiscal year 2010."

  DOT Secretary Ray LaHood has proposed that lawmakers pass an 18-month highway reauthorization bill that lasts through March 2011, and that the Highway Trust Fund immediately be replenished with $20 billion in cash. However, 43 Democratic members of the House Transportation and Infrastructure Committee sent a letter to President Obama on June 24 arguing against the 18-month extension. Lawmakers prefer a massive surface transportation authorization bill that is now under consideration by the Transportation panel. Ways and Means members are considering whether to increase the current gasoline tax of 18.4 cents per gallon to add money to the trust fund.

  Rep. Charles Boustany Jr., R-La., said simply transferring money from the Treasury general fund to the Highway Trust Fund is not an acceptable long-term solution to the nation's transportation infrastructure needs. Moreover, Congress is likely to be on its August recess when the trust fund runs dry, so lawmakers really only have until the end of July to find a funding solution that the president will sign.

  By Stephen K. Cooper, CCH News Staff

Ways and Means Press Release: Chairmen Neal and Lewis on Highway and Transit Investment Needs
 

CCH (cch.taxgroup.com) reports:

  House lawmakers are expected to consider the American Clean Energy and Security Bill of 2009 (HR 2454) on June 26, just before leaving town for the week-long Independence Day recess. The measure includes a provision to modify the earned income tax credit by increasing the phaseout rate from $5,280 to $13,590, effective after December 31, 2011. The bill also includes a provision to allow the Treasury to transfer money from the general fund to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund to offset any changes in benefit costs and tax revenues caused by the energy measure.

  President Obama, in a Rose Garden statement, said the House energy bill would spur the development of low-carbon energy sources, such as wind, solar, geothermal, clean coal and nuclear power. He said the legislation would create incentives that will "spark a clean energy transformation" of the U.S. economy. Obama maintained that the energy bill will create millions of new jobs and urged lawmakers to support the measure.

  House Speaker Nancy Pelosi, D-Calif., in remarks to reporters, said the energy bill would reduce America's dependence on foreign oil, reduce pollution and create jobs. Former Vice President Gore had been scheduled to come to Capitol Hill to meet with undecided Democrats, but a last-minute agreement between House Agriculture Chairman Collin C. Peterson, D-Minn., and House Energy and Commerce Chairman Henry Waxman, D-Calif., reportedly persuaded more members to support the legislation.

  GOP lawmakers are not expected to support the measure, which they characterized as a national energy tax that will exacerbate the economic recession. House Republican Study Committee Chairman Tom Price, R-Ga., cited a study by the National Black Chamber of Commerce that predicts that, by the year 2030, the Waxman-Markey legislation will lower U.S. gross domestic product by roughly $350 billion; result in 2.5 million fewer jobs; and take an average of $390 per year out of American worker's pockets.

  By Stephen K. Cooper and Paula Cruickshank, CCH News Staff

Tax-Related Portions of the American Clean Energy and Security Bill, as Reported by the House Rules Committee, HR 2454
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Kentucky Legislature has reached consensus on Gov. Steve Beshear's special session economic development package that contains a broad range of corporation and personal income tax credits, sales and use tax incentives, and a pari-mutuel tax exemption for certain horse racing events, according to a Legislative Research Commission (LRC) news release. Both the House of Representatives (TAXDAY, 2009/06/19, S.5) and the Senate (TAXDAY, 2009/06/23, S.12) passed different versions of a bill (H.B. 3) amending the original provisions proposed by the governor (TAXDAY, 2009/06/12, S.17). The LRC said changes to the bill that were agreed upon by House and Senate conferees, include:

  -- a personal income tax exemption for Kentucky's active-duty military personnel;

  -- a motor vehicle use tax incentive that would only tax car buyers on the difference between a new car purchase and the owner's trade-in; and

  -- an extension of tourism development incentives.

  The tax exemption for military personnel was part of special session legislation proposed by the governor that would have authorized the use of Video Lottery Terminals (VLTs) at certain Kentucky horse racing tracks (TAXDAY, 2009/06/10, S.11). The VLT bill (H.B. 2) was passed by the House, but later died in Senate committee.

  Subscribers can view the LRC news releases.

News Release , Kentucky LRC, June 24, 2009; Capitol Notes , Kentucky LRC, June 22, 2009
 

CCH (cch.taxgroup.com) reports:

  The House Education and Labor Committee on June 24 approved legislation aimed at giving investors more information about fees that are charged to their 401(k) retirement plans. By a vote of 29-to-17, lawmakers approved the 401(k) Fair Disclosure and Pension Security Bill (HR 2989). The legislation is designed to provide employees with more information about fees taken from their retirement plans, and more options when they choose their investment plans. Rep. George Miller, D-Calif., chairman of the Education and Labor Committee, said the bill is a response to employee worries about the value of their retirement plans during the current economic recession.

  The legislation would require retirement plans to give investors a quarterly statement that includes a dollar figure representing all fees taken from their 401(k) plan. Service providers and plan administrators would be required to categorize fees as administrative fees, investment management fees, transaction fees and other fees. The measure would also require service providers to disclose any financial relationships so that companies that sponsor 401(k) plans can make sure there are no conflicts of interest.

  A spokesman for the Education and Labor Committee said Miller will determine the next step for the legislation after consulting with the House Ways and Means Committee, which also has jurisdiction over
401(k) plans. Meanwhile, a similar bill, introduced by Senate Special Committee on Aging Chairman Herb Kohl, D-Wis., and Sen. Tom Harkin, D-Iowa, is pending in the Senate. Their bill, the Defined Contribution Fee Disclosure Bill (Sen 401), would require a 401(k) plan to provide a written statement of services provided, as well as the expected total annual service charge.

  By Stephen K. Cooper, CCH News Staff

401(k) Fair Disclosure and Pension Security Act of 2009, HR 2989

Defined Contribution Fee Disclosure Act of 2009, Sen 401
 

CCH (cch.taxgroup.com) reports:

  Lawmakers on the House Ways and Means Committee traded barbs on June 24 about the nature and effect of comprehensive health care reform legislation now under consideration by Congress. At a committee hearing on the health care draft legislation proposed by Democratic leaders, GOP lawmakers attempted to characterize the public insurance option included in the health care reform plan as a wholesale move toward socialized medicine.

  Ways and Means ranking member Dave Camp, R-Mich., said an independent analysis of the Democratic plan shows that a public option would cost $3.5 trillion. Committee Chairman Charles B. Rangel, D-N.Y., remarked that Congress would use estimates from the Congressional Budget Office (CBO) when determining the cost and method of paying for health care reform. Democrats maintained that offering Americans a public option for health care would provide competition for private insurers and lower prices for patients. The health care discussion draft legislation was written by Democrats on the House Ways and Means, Energy and Commerce and Education and Labor Committees, which held a third day of hearings on the proposal on June 24.

  Randel K. Johnson, senior vice president of Labor, Immigration, & Employee Benefits for the U.S. Chamber of Commerce, told lawmakers that the only way health care reform can appear to be budget-neutral is for Congress to impose massive new taxes. He said creating a European-style value-added tax would harm the economy and hurt those with the lowest incomes. Other regressive ideas under consideration by Congress include taxing sugary drinks and alcohol, and modifying flexible spending accounts and health savings accounts.

HELP Committee Seeks Budget Score

  The Senate Health, Education, Labor, and Pensions (HELP) Committee on June 24 asked the CBO to score the budget impact of two competing proposals requiring employers to help pay for employee private health insurance coverage if they are not offered coverage in the workplace. The so-called "pay or play "mandate would exempt small businesses, according to Sen. Christopher Dodd, D-Conn., but the committee has yet to determine who would qualify as a small business. The CBO has also been asked to determine the cost of a proposal requiring businesses with large numbers of employees covered under Medicaid to pay additional taxes.

  The committee plans to wrap up work on the less-controversial portions of its health care reform bill by the end of the week of June 22 and resume consideration of more difficult sections, including public-backed insurance programs and how to pay for the overhaul, when Congress returns from its Fourth of July recess during the week beginning July 6.

  By Jeff Carlson and Stephen K. Cooper, CCH News Staff

Ways and Means Press Release: Ways and Means Focuses on Health Reform Proposals to Reduce Costs, Protect Current Coverage and Preserve Choice for Patients to Ensure Affordable Care

CCH (cch.taxgroup.com) reports:

  President Obama on June 24 signed legislation aimed at boosting the sale of vehicles at financially struggling U.S. automobile dealerships. The so-called "cash for clunkers" program provides $1 billion in tax-free vouchers to automobile dealers who participate in the new program. The program vouchers, worth $3,500 or $4,500, will be given to dealers when consumers trade in old vehicles for ones with higher fuel efficiency. The vouchers will not be considered taxable income for the car buyer.

  The new law limits the number of vouchers to one per customer, including joint registered owners of a single eligible trade-in vehicle. The car voucher measure is included in the 2009 Supplemental Appropriations Bill for Iraq, Afghanistan, Pakistan and Pandemic Flu (HR 2346).

  By Paula Cruickshank, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Various prescribed rates for federal income tax purposes for July 2009 have been provided by the IRS. The annual short-term, mid-term, and long-term applicable federal interest rates (AFRs) are 0.82 percent, 2.76 percent and 4.36 percent, respectively. The semiannual short-term, mid-term, and long-term AFRs are 0.82 percent, 2.74 percent and 4.31 percent, respectively. Quarterly short-term, mid-term and long-term AFRs are 0.82 percent, 2.73 percent and 4.29 percent, respectively. Finally, the monthly short-term, mid-term and long-term rates are 0.82 percent, 2.72 percent and 4.27 percent, respectively.

  The short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for July 2009 for purposes of Code Sec. 1288(b) are 0.84 percent, 2.22 percent, and 4.33 percent, respectively, when annual compounding is used.

  Additionally, the Code Sec. 382 adjusted federal long-term rate is 4.33 percent, and the long-term tax-exempt rate is 4.58 percent. The Code Sec. 42(b)(2) appropriate percentage for the 70-percent present-value, low-income housing credit is 7.82 percent, and the appropriate percentage for the 30-percent present-value, low-income housing credit is 3.35 percent. TheCode 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 3.40 percent.

  Finally, the Code Sec. 7872(e)(2) blended annual rate for 2009 is 0.82 percent.

Rev. Rul. 2009-20, 2009FED ¶46,411

Rev. Rul. 2009-20, FINH ¶30,622

Other References:

 
Code Sec. 42

  CCH Reference - 2009FED ¶173.02

  CCH Reference - 2009FED ¶176.01

  CCH Reference - 2009FED ¶4385.03

 
Code Sec. 382

  CCH Reference - 2009FED ¶17,115.28

 
Code Sec. 1274

  CCH Reference - 2009FED ¶31,310.05

 
Code Sec. 7520

  CCH Reference - 2009FED ¶42,785.45

  CCH Reference - FINH ¶22,630.05

 
Code Sec. 7872

  CCH Reference - 2009FED ¶43,960.14

  CCH Reference - FINH ¶18,950.05

  CCH Reference - FINH ¶18,950.80

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 36,162.05

CCH (cch.taxgroup.com) reports:

  "Pay-for-Performance Success Payments" under the U.S. Government's Home Affordable Modification Program (HAMP) are excludable from gross income. Under HAMP, which was created in response to the unprecedented financial stress of 2008 and 2009, financially stressed homeowners that make timely payments on modified loans are eligible to have incentive payments made on their behalf to lenders/investors. These payments reduce the principal balance on the homeowner's mortgage loan. Absent an exclusion, these payments would constitute gross income under Code Sec. 61(a). However, the HAMP "Pay-for-Performance Success Payments" are excluded from income because they meet the definition of payments under governmental social benefit programs for the promotion of the general welfare and not for services rendered. See Rev. Rul. 74-205, 1974-1 C.B. 20 and Rev. Rul. 98-19, 1998-1 C.B. 840 for other examples of qualifying payments.

Rev. Rul. 2009-19, 2009FED ¶46,412

Other References:

 
Code Sec. 61

  CCH Reference - 2009FED ¶5504.184

  Tax Research Consultant

  CCH Reference - TRC: INDIV: 33,350

CCH (cch.taxgroup.com) reports:

  As Congress considers several health care reform proposals, President Obama said that he is "very optimistic" and hopes that federal lawmakers will make significant progress in the weeks ahead. The president, at a news conference on June 23, made his case for including a public insurance option in the legislation, but also indicated he is open to negotiations on the controversial proposal.

  Obama called the public insurance plan an important tool for keeping down private insurance costs. Nevertheless, Obama noted that Congress is in the early stages of the legislative process and that he is drawing no lines in the sand, except that a final package must lower health care costs and be paid for.

Senate Action

  The Senate Health, Education, Labor and Pensions (HELP) Committee could finish marking up its health care reform bill by the end of the week of June 22, despite the fact that major sections of the legislation remain incomplete, according to Sen. Christopher Dodd, D-Conn. Committee Democrats on June 23 approved 46 Republican amendments and a provision offered by Sen. Tom Harkin, D-Iowa, that would phase in funding for a preventative public health fund over a 10-year period.

  Senate Finance Committee Chairman Max Baucus, D-Mont., said he was uncertain when he would release his health care reform draft, but remained optimistic that it would have bipartisan support. Senate Budget Committee Chairman Kent Conrad, D-N.D., said lawmakers had brought down the overall cost of the bill to around $1.2 trillion and were still working to cut another $200 billion. A preliminary estimate by the Congressional Budget Office (CBO) of an earlier draft had pegged the cost at $1.6 trillion, setting off a firestorm of criticism and forcing the committee to rework their reform plan.

House Energy Bill

  House lawmakers are moving ahead with plans to pass the American Clean Energy and Security Bill of 2009 (HR 2454) before leaving town for the weeklong Independence Day recess. The House Rules Committee plans to hold a hearing on the energy bill on June 25 and is in the process of accepting amendments from lawmakers. If the committee approves the bill, it will likely go to the House floor for a vote on the following day.

  The measure includes a provision to modify the earned income tax credit by increasing the phaseout rate from $5,280 to $13,590, effective after December 31, 2011. The bill also includes a provision to allow the Treasury to transfer money from the general fund to the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund to offset any changes in benefit costs and tax revenues caused by the energy bill.

  The president commended the House for moving forward on energy legislation, which he said will lessen U.S. dependence on foreign oil and encourage the development of clean energy sources, such as wind, solar and geothermal power. When asked if the deepening economic crisis warranted a second stimulus package, Obama responded, "not yet," and said it was important to see how the economy "evolves" and how effectively the existing package spurs economic growth.

  By Jeff Carlson, Stephen K. Cooper and Paula Cruickshank, CCH News Staff

Tax-Related Sections of the Rules Committee Draft Proposal of American Clean Energy and Security Act of 2009, HR 2454
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  An amended version of Gov. Steve Beshear's special session economic development package containing income tax credits, sales and use tax incentives, and a pari-mutuel tax exemption for certain horse racing events passed by a wide margin in the Kentucky Senate. The original provisions proposed by the governor (TAXDAY, 2009/06/12, S.17), along with amendments made by the House of Representatives (TAXDAY, 2009/06/19, S.5), were retained in the Senate version, but the following provisions were added or changed:

  -- companies eligible to claim the new economic development credit against the corporation income tax, limited liability entity tax (LLET), and personal income tax, which would replace the Kentucky Rural Economic Development Act (KREDA), the Kentucky Economic Opportunity Zone Act (KEOZ), the Kentucky Jobs Development Act (KJDA), and the Kentucky Industrial Development Act (KIDA) credit programs, would be required to pay at least 90% of all new employees at the target minimum wage levels and advance disbursement of the credits would be subject to General Assembly approval;

  -- companies eligible to claim the alternative and renewable energy facilities credit against corporation and personal income tax, limited liability entity tax (LLET), sales and use tax, and severance tax liability would be allowed to use tar sands as an energy feedstock;

  -- personal income taxpayers would be allowed to claim a one-time, nonrefundable credit for the purchase of a new home;

  -- a 10% surcharge would be imposed on purchases of Kentucky lottery tickets to be remitted in the same manner as sales and use taxes; and

  -- an excise tax would be imposed on horse racing tracks equal to 1.5% of the taxable handle attributable to each live race conducted at the track.

  Subscribers can view the bill as passed by the Senate.

 
H.B. 3, as passed by the Kentucky Senate on June 19, 2009

CCH (cch.taxgroup.com) reports:

  In a sharply worded letter, a group of state legislators stated unequivocally their opposition to the Uniform Law Commission (ULC) proceeding with its current review of the Uniform Division of Income for Tax Purposes Act (UDITPA). The letter was sent to the ULC's leadership by the National Conference of State Legislatures (NCSL) Executive Committee Task Force on State and Local Taxation of Communications and Electronic Commerce.

  In 2008, the ULC appointed a drafting committee to revise the 50-year-old UDITPA. After certain legislators and taxpayers expressed their strong opposition to the revision effort, the ULC downgraded the panel to a study committee. However, the opposition to the committee's efforts did not abate. Following a May 14 committee conference call, the committee chair asked the ULC leadership to have until January 2010 to "explore with elected executive and legislative leaders of the states the need to revise UDITPA." (TAXDAY, 2009/05/29, S.1) The NCSL Task Force letter was a response to this request.

  The letter says the Task Force found the failure to allow legislators to participate in the May 14 conference call "incredibly offensive" and "met with incredulity" the suggestion that the committee was unclear as to legislators' stance on the revision effort. On May 30, 2009, the Task Force voted unanimously to oppose the continuation of the study committee and the effort to revise UDITPA. The letter concludes with a caution that the ULC not "squander [its] trusted trademark on an ill-conceived, ill-advised and unwarranted project."

  Subscribers can view the NCSL's letter.

 
Letter, NCSL Task Force on Communications & Electronic Commerce, June 19, 2009
 

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 documents did not discuss federal tax issues; rather, they contained information generally gathered to facilitate the filing of a tax return. Such accounting advice was not covered by the tax practitioner privilege. Several memoranda and notes were not privileged because they did not reflect confidential communication between a client and tax practitioner for the purpose of providing federal income tax advice.

  The government also met its burden of showing that the 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 communications between the corporation and its tax advisors were made in connection with the promotion of the corporation's participation in a tax shelter as defined in Code Sec. 6662(d)(2)(C)(ii).

  Affirming a DC Ill. decision, 2008-2 USTC ¶50,482.

Valero Energy Corporation, CA-7, 2009-1 USTC ¶50,445

Other References:

 
Code Sec. 7525

  CCH Reference - 2009FED ¶42,816F.25

  Tax Research Consultant

  CCH Reference - TRC IRS: 21,404

CCH (cch.taxgroup.com) reports:

  An individual's sentence for willful tax evasion and failure to collect and pay over payroll taxes was incorrectly calculated because the amount of tax loss used in sentencing improperly included the same amount twice. The individual, as a responsible party of a corporation, did not withhold tax from his own wages, and as an individual did not pay tax on those wages. These funds, however, were only subject to being taxed once, Similarly, the restitution order should have included the amount only once.

  Further, the individual's offense level under the sentencing guidelines was erroneously enhanced for abusing his position of public or private trust. Although the IRS was the victim of the individual's charged conduct, the individual was not in a position of trust in relation to the IRS because his only duty was to collect and pay over the payroll taxes. However, the court properly imposed a sophisticated means enhancement because the individual sought to hide his ownership interest in a financial advisory firm and established various business entities to disguise the distribution of profits. The individual's sentence was also properly enhanced for perjury because his trial testimony was false, material and intended to affect the outcome of the trial.

  Vacating and remanding an unreported DC Ohio decision.

M.W. May, CA-6, 2009-1 USTC ¶50,444

Other References:

 
Code Sec. 7201

 
Code Sec. 7202

  CCH Reference - 2009FED ¶41,318.22

  CCH Reference - 2009FED ¶41,318.221

  CCH Reference - 2009FED ¶41,318.222

  CCH Reference - 2009FED ¶41,318.224

  Tax Research Consultant

  CCH Reference - TRC IRS: 66,462
CCH Reference - TRC IRS: 66,462.10
CCH Reference - TRC IRS: 66,462.20

CCH (cch.taxgroup.com) reports:

  The IRS has released guidance encouraging taxpayers to safeguard themselves during the 2009 hurricane season. The Service suggests that taxpayers keep an extra set of records, preferably electronic records, in a location separate from their storage of original documents. The IRS also recommends that taxpayers take pictures or videos of items in their homes in order to more easily document items lost in a disaster. Finally, the IRS encourages employers to update emergency plans as needed and to ask payroll service providers if they have fiduciary bonds in place in the event of default by the provider.

  If a disaster occurs, the IRS has specialists available who are trained to handle disaster-related issues at (866) 562-5227. The IRS can also provide copies or transcripts of tax returns at no cost to taxpayers located in federal disaster areas.

IR-2009-61,
2009FED ¶46,408

Other References:

 
Code Sec. 165

  CCH Reference - 2009FED ¶10,005.42

 
Code Sec. 6001

  CCH Reference - 2009FED ¶35,111.30

 
Code Sec. 7508A

  CCH Reference - 2009FED ¶42,687C.101

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 30,104.10
CCH Reference - TRC FILEBUS: 15,110
CCH Reference -
TRC IRS: 9,300
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  For Oregon corporation excise (income) and personal income tax purposes, otherwise deductible intangible expenses that have been directly or indirectly paid, accrued, or incurred in connection with one or more direct or indirect transactions with one or more related members, and that were received by one or more related members that are not included in the same state tax return as the taxpayer, must be added back to federal taxable income. However, as discussed below, a credit is allowed against the corporate income taxes otherwise due if a related member pays tax on the same income that has been added back.

CCH (cch.taxgroup.com) reports:

  On June 18, 2009, after revealing that New Jersey expects to receive $700 million in unanticipated revenue as a result of the Tax Amnesty program authorized in March, Gov. Jon S. Corzine said he wants to apply the funds to property tax relief. Plans to vote on the FY 2010 $28.6 billion budget were halted by the governor who said he had met with legislative leaders and wanted to revise the budget in light of the latest developments to include the proposed property tax relief.

Press Release , Office of Gov. Jon S. Corzine, June 19, 2009

CCH (cch.taxgroup.com) reports:

  During the past week, the Senate approved the "cash for clunkers" program, but Senate Finance Committee Chairman Max Baucus, D-Mont., said on June 17 that health care reform markup may not be held prior to the July 4 recess. The White House, however, did not consider this delay as a sign that health care reform would not pass in 2009. House Democrats introduced PAYGO legislation, while House subcommittees looked into minority participation in the New Market tax credit program. The IRS issued guidance affecting consolidated groups, the plug-in electric drive motor vehicle credit and Recovery Zone Bonds.

Congress

  Lawmakers from the Senate Finance Committee and House Committee on Ways and Means on June 12 asked IRS Commissioner Douglas H. Shulman to suspend certain penalties assessed on small businesses while Congress works on legislation to address what they term an inequitable and unintended consequence in the tax code (TAXDAY, 2009/06/16, C.1). The lawmakers argued that small businesses with investments in listed tax shelter transactions that are generating modest tax benefits have received tax penalties significantly larger than the tax benefits received. The lawmakers requested that Shulman suspend efforts to collect Code Sec. 6707A liabilities while Congress acts to remedy the situation. Code Sec. 6707A was enacted in the American Jobs Creation Act of 2004 (P.L. 108-357) as part of a package of provisions intended to help the IRS detect, deter and shut down tax shelters.

  Senate Finance Committee Chairman Max Baucus, D-Mont., said on June 17 that he would not have his health care reform mark ready by the end of the week of June 15 as initially promised and raised doubts that he would hold a markup prior to the July 4 recess (TAXDAY, 2009/06/18, C.1). Finance Committee Democrats have been scrambling to find ways to bring down the cost, estimated by the Congressional Budget Office (CBO) at nearly $1.6 trillion, to under $1 trillion.

  The Senate on June 18 approved a proposal known as the "cash for clunkers" program, which would provide $1 billion in tax-free vouchers to automobile dealers who participate in the new program aimed at revitalizing sagging vehicle sales (TAXDAY, 2009/06/19, C.3). The program vouchers, worth $3,500 or $4,500, will be given to dealers when consumers trade in an old vehicle for one with higher fuel efficiency and will not be considered taxable income for the purchaser.

  With the New Market Tax Credit (NMTC) program set to expire at the end of 2009, two House subcommittees looked into the issue of whether minority firms are fully participating in the program (TAXDAY, 2009/06/19, C.1). Donna J. Gambrell, director of the Treasury Department's Community Development Financial Institutions Fund, explained the program on June 18 before a joint hearing of the House Ways and Means Select Revenue Measures Subcommittee and the House Financial Services Subcommittee on Domestic Monetary Policy and Technology.

  The hearing was called as a result of a Government Accountability Office (GAO) study which concluded that minority-owned CDEs have not received allocation awards in proportion to their representation in the application pool (TAXDAY, 2009/06/02, M.3). Gambrell said the discrepancy is not attributable to biases in the application review or selection process. Instead, the capacity of each applicant, based on its merit, rather than ownership structure, is what determines whether NMTCs will be awarded.

  House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., has scheduled a June 24 hearing to focus on proposals to reform the health system, including the discussion draft proposal released by Democratic leaders on June 19. The hearing will begin at 10:00 a.m. in the main committee hearing room, 1100 Longworth House Office Building (TAXDAY, 2009/06/19, C.5).

  House Democrats on June 17 introduced President Obama's pay-as-you-go (PAYGO) legislation, which would require Congress to pay for new tax cuts or entitlement programs (TAXDAY, 2009/06/18, C.2) . Democrats will work with the administration to resolve the differences between the president's proposal and existing House rules, said House Majority Leader Steny H. Hoyer, D-Md. Obama's proposal would not trigger a sequester if the net effect with regard to all legislation enacted during a year was that the legislation was paid for over a 10-year period, lawmakers explained.

White House

  The Obama administration does not regard the delay by the Finance Committee as a setback that could keep Congress from passing a health care reform bill this year, according to White House Press Secretary Robert Gibbs (TAXDAY, 2009/06/18, C.1). He noted that Baucus shares the administration's goal to win bipartisan support for a bill that constrains health care costs and is paid for.

  Office of Management and Budget Director Peter Orszag emphasized the positive about the CBO health care cost estimates. Orszag pointed out the CBO policy options that could achieve long-term budget savings and that were included in President Obama's budget or health care reform proposals. They include the creation of accountable care organizations, bundling payments to hospitals and other providers, and expanding the use of wellness and preventive services. Likewise, Gibbs emphasized the common principles held by the BPC and the administration to lower health care costs for families, businesses and governments, guarantee choice of doctors and plans, and provide quality, affordable health care.

  Gibbs noted there are many "moving parts" under consideration in developing a final package. Among those proposals, Gibbs said that establishing nonprofit cooperatives is a constructive idea that should be discussed as part of health care reform deliberations. However, Obama is holding firm about including a public insurance option, insisting that will not mean a government takeover of health care and that it still ensures choice of doctors and competitively priced plans.

IRS

  Employer-provided Cell Phones. On June 16 IRS Commissioner Douglas Shulman announced that the agency supports easing the listed property rules under Code Sec. 280F for employer-provided cell phones. Shulman's announcement came on the heels of the IRS's proposal in Notice 2009-46 (TAXDAY, 2009/06/08, I.1) to simplify the substantiation rules for employer-provided cell phones. To allay confusion that the IRS was planning tougher enforcement of the current rules, Shulman announced that the IRS does not intent to crack down on employer-provided cell phones despite media reports. In the House, legislation (HR 690) has been introduced to remove cell phones from the category of Code Sec. 280F listed property.

  Consolidated Groups. Recently released guidance by the IRS (Rev. Proc. 2009-31, TAXDAY, 2009/06/17, I.1) details the procedures for a consolidated group to elect to account for intercompany transactions on a separate entity basis under
Reg. §1.1502-13(e)(3). Requests must be submitted as a private letter ruling request under provisions of Rev. Proc. 2009-1, I.R.B. 2009-1, 1, and apply to all members of the consolidated group for the consent year. The guidance is substantially similar to previous guidance set forth in Rev. Proc. 97-49, 1997-2 CB 523, except for various procedures regarding the IRS's review of election requests and consideration of whether to grant or revoke an election under the regulation.

  Plug-in Electric Drive Motor Vehicle Credit. The IRS has issued guidance (Notice 2009-54, TAXDAY, 2009/06/15, I.6) for purchasers and manufacturers of the motor vehicles qualifying for the plug-in electric drive motor vehicle credit under Code Sec. 30D. The guidance includes procedures that a vehicle manufacturer needs to follow in order to certify the motor vehicle meets certain requirements to claim the credit, and the amount of the credit allowable for the motor vehicle. The IRS will review and acknowledge the certification by the manufacturer. The guidance also provides that purchasers may rely on the manufacturer's certification in determining whether the credit is allowable for the vehicle, and the amount of the credit itself.

  Recovery Zone Bonds. Treasury and the IRS have issued guidance on the maximum face amount of Recovery Zone Bonds - both Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds - that may be issued by each state and counties and large municipalities within each state before January 1, 2011, under Code Secs 1400U-2 and
1400U-3 (TAXDAY, 2009/06/15, I.5). The guidance also provides interim rules specifying the required information reporting associated with Recovery Zone Bonds, defining "issuers" of Recovery Zone Bonds and entities authorized to allocate volume cap to the ultimate beneficiaries, and also providing that the Code Sec. 148(d) definition of "reasonably required reserve or replacement fund" applies.

  TIGTA. A new Treasury Inspector General for Tax Administration (TIGTA) report reveals that IRS collection staff delayed initiating collection activities in 21 percent of cases reviewed by TIGTA ("Enforcement Actions Were Not Always Timely Initiated When Taxpayers Did Not Respond to Contact Attempts or Missed Deadlines," Reference Number: 2009-30-081, TAXDAY, 2009/06/19, T.1). TIGTA concluded, as a result, that IRS collection enforcement tools, including liens, levies and seizures, were either not used or were not used soon enough in approximately 4,250 cases of the 20,270 cases it identified. The IRS agreed with the two recommendations made by TIGTA: (1) issue a memorandum re-emphasizing the IRS policy for effective follow-up responses to missed deadlines; and (2) assess the adequacy of taking enforcement actions as part of the operational reviews of Area Offices.

  International Tax Enforcement. The IRS and tax/law enforcement authorities in the U.S. Virgin Islands recently updated a memorandum of understanding (MOU) to share information and resources in efforts to combat tax evasion (TAXDAY, 2009/06/18, I.2). The revised MOU is expected to be signed in the near future, according to the Justice Department. Under the MOU, the IRS and tax/law enforcement bodies in the U.S. Virgin Islands agree to cooperate in the identification, investigation and prosecution of tax crimes. The IRS Large and Mid-Sized Business (LMS Division and IRS Criminal Investigation will assist the Virgin Islands Internal Revenue Bureau and the Virgin Islands Department of Justice.

  By Jeff Carlson, Stephen K Cooper, Paula Cruickshank and Hilary Goehausen, CCH News Staff

CCH (cch.taxgroup.com) reports:

  Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) the estate tax is scheduled to go from a 45-percent maximum rate and a $3.5 million exclusion in 2009, to total repeal during 2010. Catherine Hughes, attorney-advisor in the Office of Tax Legislative Counsel for Treasury, predicted during a June 18 Grant Thornton webcast on the Obama budget proposal that action to prevent this result is highly likely. In its recent budget proposals in the Treasury "Greenbook," the Obama administration proposed that, instead of a total repeal, the 2009 parameters for the estate tax should be permanently enacted. Hughes gave insights on several aspects of the overall proposal that could eventually survive the vetting process as final legislation takes shape.

Consistency in Value

  The Obama administration budget proposal would require beneficiaries of an estate to report, on disposition, as the basis of property they receive, the fair market value of the asset reported on the decedent's estate tax return. Hughes explained that because the Internal Revenue Code does not currently have any direct provisions tying the fair market value of the property to the recipient's basis, recipients are not directly prevented from manipulating their basis (and therefore their recognized gain or loss) when subsequently selling the property.

  The Obama administration would place one further caveat to this requirement to avoid incorrect reporting. It would allow recipients to use a basis that is less than or equal to the estate tax reported value. "That's a one-sided proposal," Hughes stated. She explained that, "the concern was, if you have a situation where ... the executor reported a value on the estate tax return and the recipient, years later, had reason to believe that the number was overstated on date of death ... when the income tax return of the beneficiary is ... going to be prepared and filed with capital gain or loss reported on the sale of that asset, we didn't want to put the preparer or the taxpayer in the position where they're using, as a basis number, a number they have reason to believe was incorrect and therefore could not meet the standards for the return preparer penalty."

Restrictions on Estate Value

  While restrictions on property generally discount the value of the property and, therefore, the amount of estate tax generated by the asset, Code Sec. 2704(b) lists certain restrictions on property that should be ignored for purposes of valuing an estate. However, certain court decisions and state law amendments have diminished the force of this provision by allowing these discounts to be effectively considered, particularly with regard to partnership interests.

  Calling this issue the "elephant in the living room for estate planners," Hughes reported that the Obama administration's proposal would add another set of restrictions on valuation discounts especially applicable to transferred interests in property. She observed that this amendment would "reinvigorate the intent and the language of the provisions of 2704" and make the statute apply as it was intended.

  The administration's proposal would also prohibit estates from discounting interests in property based on limitations on the right to liquidate to the extent more restrictive than a safe-harbor standard to be set forth in Treasury regulations. Additionally, the proposal calls for regulations to determine when certain interests held by charities and other nonfamily members would be considered held by family members.

  "Because this is such a significant issue, we felt that it would make sense to leave the details to regulations subject to public comment to make sure we got it right instead of letting the statute draw the line from which things would be measured," she said.

  By Torie Cole, CCH News Staff

CCH (cch.taxgroup.com) reports:

  House Democratic leaders unveiled a comprehensive health care reform plan on June 19, calling for the establishment of a public health insurance program that would compete with private insurers to lower costs. The proposal would create a Health Insurance Exchange to provide a functional marketplace for individuals and small employers to comparison shop among private and public insurers. Few details of how the plan would be paid for were announced, and lawmakers said they were awaiting estimates from the Congressional Budget Office.

  In a press conference to announce the discussion draft, House Ways and Means Chairman Charles B. Rangel, D-N.Y., said his committee, along with the House Education and Labor and the House Energy and Commerce committees, would hold hearings and work out final details in the coming weeks. Ways and Means has already scheduled a hearing on the discussion draft on June 24. President Obama, in a written statement, said the House Democrats' proposal is a "major step" toward improving the quality of health care and making it more available and affordable.

  The proposal was almost immediately sharply criticized by the top Republican lawmaker in the House. House Minority Leader John Boehner, R-Ohio, faulted the Democrats' plan for raising taxes, rationing care and empowering government bureaucrats to make key medical decisions. "This plan will make health care more expensive, reduce the quality of care for millions of families and small businesses, cost American jobs, and force untold millions of Americans off their current plans and into a government-run nightmare operated by federal bureaucrats," Boehner charged.

  Rep. Henry Waxman, D-Calif., who chairs the Energy and Commerce panel, said the Democrats were considering changes to the Medicare and Medicaid program, such as forcing pharmaceutical manufacturers to repay excessive profits made on drugs sold to Medicare patients. The bill would impose a tax on individuals and families who do not have their own coverage. In addition, small businesses would get a 50-percent health care credit toward the expense of providing coverage to their employees.

  By Stephen K. Cooper, CCH News Staff

Draft of Health Care Reform Bill Text

House Tri-Committee Health Reform Discussion Draft Summary
 

CCH (cch.taxgroup.com) reports:

  It is not clear how the House Ways and Means Committee will proceed on the president's international tax proposals, a committee staff member indicated June 19. Melissa Mueller, the committee's majority tax counsel, told a group of international tax practitioners that the message has gotten "fuzzy." Speaking at a BNA Tax Management luncheon held at Buchanan, Ingersoll & Rooney P.C. and moderated by Herman Bouma.Mueller, Mueller stressed that she was expressing her own views and was not speaking on behalf of Committee Chairman Charles Rangel, D-N.Y., or Rep. Richard Neal, D-Mass., for whom she works.

  Some view the proposals as addressing tax evasion, while others view the issues as matters of policy, not tax evasion, Mueller said. Neal, for example, has indicated that some proposals, such as deferring U.S. taxes, involve policy choices, not abuse. Reform concerns are growing out of the issue of hidden overseas bank accounts. With the president carrying out his own tax reform study, the Ways and Means Committee may be reluctant to move on some issues until the administration makes its recommendations.

  While some members talk about bringing jobs back to the United States, Mueller noted that companies may have substantial business reasons for locating overseas that do not depend on U.S. taxation. Eliminating deferral will not necessarily bring back jobs.

  Mueller said that changes to the check-the-box (CT rules are now estimated to raise $30 billion in revenue, a sharp decline from the initial estimate of $80 billion. Some practitioners at the luncheon, including Pam Olson of Skadden, Arps, Slate, Meagher & Flom LLP, questioned whether the changes would raise any revenue. Mueller said that foreign tax credit (FTC) proposals are "scored" to raise $40-50 billion in revenue, while changes to the deferral rules are estimated to raise $50-60 billion.

  Michael Durst of Steptoe & Johnson LLP commented that no one knows the economic impact of these proposals. Companies do not know the impact and do not know how to explain their concerns. He suggested that the CTB proposal could increase the overall tax burden on U.S. companies without raising much tax revenue. Barbara Angus of Ernst & Young LLP commented that the CTB and FTC proposals all have an impact on tax deferral, even though they are not labeled in that manner, and that the cumulative impact could be substantial.

  Mueller said that the committee staff has not been briefed on the proposals. She urged the practitioners to have private companies, not just trade groups, contact the committee to discuss the impact of the proposals.

  Mueller mentioned that a value-added tax (VAT) had been identified as a possible revenue-raiser for health reform. Asked about the seriousness of this proposal, Mueller said that the cost of health reform may elicit big proposals, and perhaps this is a time to move on a VAT.

  Asked whether there will be another generation of the "mother of all tax bills," Mueller said that things had changed, and she could not say what might be in the next bill. A reduction in overall corporate tax rates to 28 percent is still a possibility. She indicated that the next tax bill could also address the issue of deferral.

  By Brant Goldwyn, CCH News Staff

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Wisconsin Senate has passed its version of the 2009-11 budget bill, which would make numerous sales and use, personal income, and corporation franchise and income tax changes. Differences between the Senate's version and the previously reported Assembly's version of the bill (TAXDAY, 2009/06/17, S.36) include those described below. Both the Assembly and the Senate worked off the version offered by the Joint Committee on Finance on May 28, 2009.

CCH (cch.taxgroup.com) reports:

  The Kentucky House of Representatives has overwhelmingly passed Gov. Steve Beshear's special session economic development package containing income tax credits, sales and use tax incentives, and a pari-mutuel tax exemption for certain horse racing events. The House added several new provisions to the Governor's original package (TAXDAY, 2009/06/12, S.17), including:

  -- a nonrefundable corporation income tax and personal income tax credit for railroad companies that invest in Kentucky track infrastructure maintenance and improvements;

  -- a nonrefundable income tax credit for railroad companies that invest in Kentucky track infrastructure for the purpose of transporting coal, oil shale, natural gas, and biomass resources, such as biodiesel or ethanol;

  -- a sales tax refund on sales generated at a "tourism development project," meaning a tourism attraction project, theme restaurant destination attraction project, entertainment destination center project, or lodging facility project; and

  -- a sales tax refund for governmental entities of sales tax generated by the sale of admissions to multipurpose public facilities of 500 to 8,000 seats.

  Subscribers can view the bill passed by the House.
 
H.B. 3, as passed by the Kentucky House of Representatives on June 17, 2009
 

CCH (cch.taxgroup.com) reports:

  Treasury Secretary Timothy F. Geithner defended the administration's proposal to grant new regulatory authority to the Federal Reserve, arguing that countries that had chosen to limit their central bank's authority over financial stability found themselves with less capacity to act as the financial crisis unfolded. "I think they found themselves in a substantially worse position than we did as a country," Geithner told the Senate Banking, Housing and Urban Affairs Committee on June 18.

  Geithner described the administration's proposals for giving the Fed additional authority as "quite modest," noting that they build on existing authority, while at the same time take some authority away. He told members that the Fed is best positioned to be the first responder in a financial emergency because it already supervises and regulates bank holding companies, including all major U.S. commercial and investment banks.

  While the proposed Financial Services Oversight Council would fill gaps in the regulatory structure where they currently exist, it would not be in a position to respond like the Fed. "You don't convene a committee to put out a fire," Geithner said.

  Ranking committee member Richard C. Shelby, R-Ala., told the hearing that claims that the Fed has the most experience to regulate the financial system, including insurance companies, hedge funds and mutual funds, gave a "grossly exaggerated" view of the Fed's expertise. Geithner responded by saying the administration does not envision such a sweeping scope of authority for the Fed. At this stage, he said, the proposed authority would largely cover the major banks and investment firms.

  Meanwhile, Sen. Charles E. Schumer, D-N.Y., questioned Geithner on why the administration had not done more to consolidate bank supervision, noting that the new proposals would still result in four bodies responsible for bank oversight. He also wondered why, with the Fed gaining new powers, it should have responsibility over state banks.

  "We thought a lot about that," Geithner said, adding that the basic principle guiding the administration's proposals was to focus on those problems that were central to the crisis. He noted that the administration decided "it was not essential to take on the more complicated challenge of fundamentally transforming the rest of the system where there's a balance now between state and federal supervision of state chartered banks."

  By Sarah Borchersen-Keto, CCH News Staff

Treasury Department News Release, TDNR TG-176
 

CCH (cch.taxgroup.com) reports:

  Two House subcommittees looked into the issue of whether minority firms are fully participating in the New Market Tax Credit (NMTC) program, which is set to expire at the end of 2009. Donna J. Gambrell, director of the Treasury Department's Community Development Financial Institutions Fund, explained the program on June 18 before a joint hearing of the House Ways and Means Select Revenue Measures Subcommittee and the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. "I believe the new markets tax credit is an efficient way to target investment into the neediest communities around the country," said Select Revenue Measures Subcommittee Chairman Richard E. Neal, D. Mass., who noted that lawmakers want to ensure that community organizations, many of which are smaller or minority-owned, have a fair shot at competing for these tax credits. The hearing concluded early without questioning by lawmakers, who had to return to the House floor for pending votes.

  Under the NMTC program, taxpayers receive a credit against federal income taxes for making qualified equity investments (QEIs) in designated community development entities (CDEs), Gambrell explained. Substantially all of these QEI dollars must be used by the CDE to provide investments in businesses and real estate developments in low-income communities. "To date, investors have invested $13.7 billion into CDEs, or over 70 percent of the NMTC allocation authority that was awarded to CDEs through 2008," Gambrell said in her written testimony. "In fact, since September of 2008, investors have invested close to $2 billion into CDEs, demonstrating the resiliency of this program in even the most difficult of economic times." She noted that in 2007, more than $4.1 billion was invested in census tracts where non-white populations exceeded 50 percent of the total population.

  The hearing was called as a result of a Government Accountability Office (GAO) study which concluded that minority-owned CDEs have not received allocation awards in proportion to their representation in the application pool (TAXDAY, 2009/06/02, M.3). Gambrell said the discrepancy is not attributable to biases in the application review or selection process. Instead, the capacity of each applicant, based on its merit, rather than ownership structure, is what determines whether NMTCs will be awarded. In addition, Gambrell suggested that many non-profit organizations that have significant minority executive control fall within the CDFI Fund's definition of a minority-owned entity, but failed to check the appropriate box on their applications.

  By Stephen K. Cooper, CCH News Staff

Ways and Means Select Revenue Measures Subcommittee Press Release: Chairman Neal on the New Markets Tax Credit Program

GAO Testimony: New Markets Tax Credit --Minority Entities Are Less Successful in Obtaining Awards Than Non-Minority Entities
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The New York Assembly has passed A.B. 8615, A.B. 8866, and A.B. 8867, which contain a variety of New York City sales tax, corporation tax, and unincorporated business tax provisions that are part of a revenue package previously announced by the mayor and the city council speaker. (TAXDAY, 2009/06/03, S.23)

  If enacted, A.B. 8866 would do the following:

  -- increase the New York City portion of the sales tax rate from 4.0% to 4.5%;

  -- repeal the exemption for purchases of clothing items priced at $110 or more; and

  -- apply the full New York City sales tax to electric and natural gas customers purchasing energy from non-utility companies.

  Under A.B. 8615, a credit reducing the unincorporated business tax would apply if the annual tax amount is less than $5,400. The credit would completely offset unincorporated business tax amounts of $3,400 or less.

  Among other changes, A.B. 8867 would phase in a single sales factor and generally require related corporations with substantial intercorporate transactions to file a combined report, regardless of the transfer price for such intercorporate transactions.

  The text of the bills is available at
http://assembly.state.ny.us/leg/?bn=a8615 for A.B. 8615,
http://assembly.state.ny.us/leg/?bn=a8866 for A.B. 8866, and
http://assembly.state.ny.us/leg/?bn=a8867 for A.B. 8867.

A.B. 8615, A.B. 8866, and A.B. 8867, as passed by the New York Assembly on June 16, 2009; Press Release , New York City Mayor's Office, June 15, 2009

CCH (cch.taxgroup.com) reports:

  Gov. Charlie Crist has signed legislation that, as previously reported (TAXDAY, 2009/05/01, S.4), decouples the Florida corporate income tax from the extension through 2009 by the American Recovery and Reinvestment Act of 2009 (Recovery Act) (P.L. 111-5) of the 50% bonus depreciation and IRC §179 limitations enacted by the Economic Stimulus Act of 2008 (P.L. 110-185). The legislation also decouples the Florida corporate income tax from a Recovery Act provision that allows taxpayers to defer income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of a corporate or business debt instrument. The legislation is operative retroactively to January 1, 2009.

  In addition, the legislation updates Florida's conformity date to January 1, 2009 (formerly, January 1, 2008).

S.B. 2504, Laws 2009, effective June 16, 2009, operative as noted

CCH (cch.taxgroup.com) reports:

  A corporation seeking a research credit for expenses incurred to develop a new computer business system was allowed to apply the rules in 2001 proposed regulations that provided an exception to the disallowance of the credit for the development of internal use software. Subsequently adopted 2003 final regulations, which the taxpayer could choose to apply to the tax years at issue, were silent regarding the test. The taxpayer, however, was not required to apply the discovery test in the 2001 regulations and could choose to apply the dramatically different discovery test in the 2003 final regulations.

  The IRS impermissibly attempted to amend the 2003 regulations with subsequently issued Announcement 2004-9, 2004-1 CB 441, that stated that the internal use software test in the 2001 regulations must be applied with the discovery test in the 2001 regulations. The announcement was not due substantial deference and could not override the 2003 regulations because it was inconsistent with the Treasury and IRS statement that the discovery test in the 2001 regulations did not accurately reflect the intent of Congress.

  Further, the 2003 regulations allowed the taxpayer to apply the rules to the tax years at issue and the two tests did not have to be applied together. Finally, the 2001 regulations were issued pursuant to the Treasury's delegated authority and had never been amended.

FedEx Corporation, DC Tenn., 2009-1 USTC ¶50,435

Other References:

 
Code Sec. 41

  CCH Reference - 2009FED ¶4362.03

  CCH Reference - 2009FED ¶4362.15

  CCH Reference - 2009FED ¶4362.25

 
Code Sec. 7805

  CCH Reference - 2009FED ¶43,282.1076

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,158.05
CCH Reference - TRC BUSEXP: 54,158.30
CCH Reference -
TRC IRS: 12,050
 

CCH (cch.taxgroup.com) reports:

  Medical residents who were full-time employees of two medical education programs were not eligible for the student exception to FICA taxes.
Reg. §31.3121(b)(10)-2(d)(3)(iii) limits the exception to students who work only part-time by providing that the services of a full-time employee, defined as an employee who works for 40 or more hours a week, are not incident to, and for the purpose of, pursuing a course of study. Legislative history indicates that FICA exceptions were directed toward part-time workers; therefore, the full-time employee limitation in the amended regulation does not conflict with the plain language of the statute, is consistent with the origin and purpose of the student exception and is not invalid. The medical residents did not fall within the student exception because they worked more than 40 hours per week; therefore, they were full-time employees and their compensation for health care and patient services was subject to FICA taxes.

  Reversing DC Minn. decisions, 2007-2 USTC ¶50,577 and 2008-1 USTC ¶50,262.

Mayo Foundation for Medical Education and Research, CA-8, 2009-1 USTC ¶50,432

Other References:

 
Code Sec. 3401

  CCH Reference - 2009FED ¶33,533.23

  CCH Reference - 2009FED ¶33,538.5056

  CCH Reference - 2009FED ¶33,538.558

  Tax Research Consultant

  CCH Reference - TRC COMPEN: 3,122

CCH (cch.taxgroup.com) reports:

  Senate Finance Committee Chairman Max Baucus, D-Mont., told reporters on June 17 that he would not have his health care reform mark ready by the end of the week of June 15 as initially promised and raised doubts that he would hold a markup prior to the July 4 recess. Finance Committee Democrats have been scrambling to find ways to bring down the cost, estimated by the Congressional Budget Office (CBO) at nearly $1.6 trillion, to under $1 trillion.

  The Obama administration does not regard the Finance Committee's delay in drafting the bill as a setback, according to White House Press Secretary Robert Gibbs. The White House still believes that health care reform legislation can be done in 2009, Gibbs said at a press briefing on June 17. Noting that Baucus is working toward a bill that has bipartisan support and contains "cost-saving measures that are paid for," Gibbs said these are the same as the administration's goals. However, the administration, to date, has not called for additional taxes to finance a final health care package beyond its own proposal to reduce certain deductions for high-income taxpayers.

  Baucus initially downplayed the CBO figures, saying they are based on a plan that is two weeks old and has undergone significant changes since then. He emphasized that he plans to look for more savings through medical spending reductions and other offsets, rather than raising revenue outside of health-care-related matters. However, mounting pressure from Republican opponents to reduce the cost and to find ways to make sure that more people are covered under reform has left Baucus with the difficult task of once again trying to forge an agreement that will gain the approval of his party and appease the loudest GOP critics of the plan.

  As Baucus retreated from his initial deadline, Sen. Christopher J. Dodd, D-Conn., filling in for the ailing Senate Health, Education, Labor and Pensions (HELP) Committee Chairman Edward M. Kennedy, D-Mass., began marking up that committee's partially completed bill. That measure has also proved controversial as the CBO estimates pegged the price so far at over $1 billion, or approximately $6,250 per newly insured, and noted that it would only provide coverage for an additional 16-million individuals out of an estimated 46-million uninsured. Moreover, the mark remains incomplete, with scant language addressing how to pay for the health care makeover. The markup is expected to take two weeks.

  Meanwhile, a health care reform proposal offered on June 17 by Bipartisan Policy Center (BPC) advisors and former Senators Howard Baker, Thomas Daschle, and Robert Dole, received high praise from Baucus and Senate Finance Committee ranking member Charles E. Grassley, R-Iowa. "The proposal not only helps identify areas of clear agreement, it addresses critical reforms, such as tackling cost concerns and ensuring quality coverage while holding insurance companies' feet to the fire, "said Baucus. "It should encourage current members of Congress that former leaders of both political parties were able to find a compromise on even the most controversial health care issues and demonstrate that bipartisan reform may be achievable, "said Grassley.

  Gibbs said the BPC's report reinforces the president's main health care reform principles: "lowering costs for families, businesses and governments; guaranteeing choice of doctors and plans; ensuring quality and affordable health care for all Americans, and adhering to fiscal discipline that does not add to the deficit." The report is available on the BPC website at http://www.bipartisanpolicy.org.

  By Jeff Carlson and Paula Cruickshank, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Wisconsin Assembly has passed its version of the 2009-11 budget bill, which would make numerous sales and use, personal income, and corporation franchise and income tax changes, including those described below. In addition, the bill would impose an oil company assessment.

CCH (cch.taxgroup.com) reports:

  The North Carolina House passed a version of the budget bill on June 13, 2009, that, if enacted, would adopt two higher personal income tax brackets, treat unitary business groups as a single taxpayer for corporate income tax purposes, extend the corporation franchise tax to apply to limited liability entities, require a corporate income tax interest expense addback for financial institutions, increase the state sales and use tax rate, extend the definition of nexus for sales tax purposes, expand the sales and use tax base, and increase the excise tax on alcoholic beverages. The Senate failed to concur in the House version of the bill and a conference committee has been appointed.

CCH (cch.taxgroup.com) reports:

  The Georgia Supreme Court has ruled in favor of the city of Columbus, Georgia, in the city's action against online travel company Expedia.com to collect unpaid hotel occupancy taxes. Previously, a superior court had issued an order compelling Expedia to collect the city's hotel occupancy taxes based on the prices its online consumers pay on Expedia.com rather than the wholesale prices Expedia contracts for with hotels. (TAXDAY, 2009/09/25, S.8) The action filed by Columbus is similar to an action filed by the city of Atlanta against online travel companies seeking payment of hotel occupancy taxes. That case currently awaits trial following remand by the supreme court for adjudication of the Atlanta's claim on the merits.(TAXDAY, 2009/06/04, S.12; TAXDAY, 2009/03/24, S.7)

  As Expedia contracted with the city of Columbus hotels to collect hotel occupancy taxes, it was obligated to remit the taxes to the appropriate authority. For purposes of the tax statute, it does not matter that Expedia is not a hotel or motel. Further, the tax should be applied to the rate charged by Expedia,, not to the wholesale rate negotiated between Expedia and the hotels because the city ordinance imposes the tax on the rate charged to the public. The undisclosed facilitation fee is also taxable because there is no means to identify the amount charged as a fee from the total charge for the room. According to the statute, the entire amount charged for a room is taxable.

Expedia, Inc. v. City of Columbus , Supreme Court of Georgia, No. S09A0567, June 15, 2009, ¶200-669

  Other References:

  Explanations at ¶60-480

CCH (cch.taxgroup.com) reports:

  A federal district court applied incorrect definitions for "discovering information" and "process of experimentation" in determining that several S corporations' projects did not involve qualified research for purposes of the research tax credit. The corporations relied on definitions contained in regulations adopted subsequent to the year at issue and those regulations expressly permitted taxpayers to rely on those provisions for prior years.

  While denying the credit, the trial court also stated that some of the corporations' activities may have constituted qualified research. Therefore, on remand, the trial court was required to apply the correct definitions to determine whether any qualified research occurred and, where records were inadequate, to estimate the expenses related to that research. Finally, the court was required to make factual determinations on whether a shareholder bonus was part of wages reasonably attributable to qualified research.

  Vacating and remanding a DC Tex. decision, 2008-2 USTC ¶50,583.

A.R. McFerrin, CA-5, 2009-1 USTC ¶50,430

Other References:

 
Code Sec. 41

  CCH Reference - 2009FED ¶4362.25

  CCH Reference - 2009FED ¶4362.33

 
Code Sec. 6001

  CCH Reference - 2009FED ¶35,111.35

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 3,166
CCH Reference - TRC BUSEXP: 54,158.05
CCH Reference - TRC BUSEXP: 54,158.10
 

CCH (cch.taxgroup.com) reports:

  Proceeds from the sale of a subdivision lot were entitled to capital gain treatment because the lot was held for investment purposes, not held primarily for sale to customers in the ordinary course of business. The taxpayers, a married couple, spent very little time selling portions of land they had originally purchased to build their home and sold only a few lots over the course of several years. Their primary business was the design and administering of 401(k) plans and trusts. Furthermore, the taxpayers were not liable for the accuracy-related penalty because they properly claimed capital gains treatment from the sale of the lot at issue and maintained adequate records. The couple was not entitled to a claimed loss from the sale of two lots because they had abandoned the issue.

B.A. Rice, TC Memo. 2009-142, Dec. 57,860(M)

Other References:

 
Code Sec. 1221

  CCH Reference - 2009FED ¶30,422.6987

 
Code Sec. 6662

  CCH Reference - 2009FED ¶39,651D.25

  Tax Research Consultant

  CCH Reference - TRC REAL: 15,050
CCH Reference - TRC PENALTY: 3104
 

CCH (cch.taxgroup.com) reports:

  IRS Commissioner Douglas H. Shulman said on June 16 that the Service supports easing the listed property rules under Code Sec. 280F for employer-provided cell phones. Shulman's announcement came just one week after the IRS proposed simplifying the substantiation rules (Notice 2009-46; TAXDAY, 2009/06/08, I.1). Shulman also stressed that the IRS is not "cracking down" on employer-provided cell phones, contrary to some media reports.

Listed Property

  Under current rules, employer-provided cell phones used for business purposes are excluded from the employee's gross income and the cell phone expense is a deductible business expense for the employer if substantiation requirements are met. Personal use, however, is included in the employee's gross income. In Notice 2009-46, the IRS announced several proposals to simplify the substantiation rules. These included a minimal personal use method, a safe harbor method and a statistical sampling method.

  The IRS's announcement was welcomed by businesses and practitioners. "Businesses need flexibility," Karen Facer-Mee, CPA, president of the Greater Philadelphia Chapter of the Pennsylvania Institute of CPAs (PICPA), told CCH. "Employers have different cell phone usage among different departments. Cell phone use by the individuals in the sales department is going to be different from cell phone use by administrative personnel."

  At the same time, confusion arose whether the IRS was intending tougher enforcement of the current rules. "Some have incorrectly implied that the IRS is cracking down on employee use of employer-provided cell phones," Shulman said in a statement. "To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals."

Pending Legislation

  Shulman called on Congress to reform the listed property rules as they apply to cell phones. "Treasury Secretary Timothy Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers." Shulman added that technological changes since 1989 have made the current rules obsolete.

  In the House, Rep. Sam Johnson, R-Tex., has introduced legislation (HR 690) to remove cell phones from the category of listed property under Code Sec. 280F. The bill has has 33 co-sponsors and has been referred to the House Ways and Means Committee. Sen. John Kerry, D-Mass., has introduced similar legislation (Sen 144) in the Senate; his bill has 45 co-sponsors and has been referred to the Senate Finance Committee.

  By George L. Yaksick, Jr., CCH News Staff

Statement of IRS Commissioner Shulman Regarding Employer-Provided Cell Phones
 

CCH (cch.taxgroup.com) reports:

  The IRS has released guidance detailing the procedures for a consolidated group to elect under Reg. §1.1502-13(e)(3) to account for intercompany transactions on a separate entity basis. These requests must be submitted as a private letter ruling request under the provisions of Rev. Proc. 2009-1, IRB 2009-1, 1, and apply to all members of the consolidated group for the consent year (and generally for all subsequent taxable years).

  The election may generally be revoked without IRS consent provided certain reporting requirements are met. Automatic revocation occurs if the effect on consolidated taxable income or liability is greater than 5 percent for each of the two taxable years preceding the current year. In addition, the IRS can revoke or modify the election if the circumstances under which the ruling was granted have changed substantially and it is determined that single entity reporting is necessary in order to clearly reflect income and tax liability.

  This new guidance is substantially the same as previous guidance in Rev. Proc. 97-49, 1997-2 CB 523, except that: (1) the IRS will now look at consolidated tax liability as well as consolidated taxable income in determining whether to grant or revoke an election under Reg. §1.1502-13(e)(3); and (2) the IRS's review of election requests and revocations will now look for a 5-percent impact on consolidated tax liability and income as opposed to a 10-percent impact.

  Elections under Reg. §1.1502-13(e)(3) are not available for transactions between members of a controlled group under Code Sec. 267(f).

 
Rev. Proc. 97-49, 1997-2 CB 523, is modified and superseded.

Rev. Proc. 2009-31, 2009FED ¶46,406

Other References:

 
Code Sec. 1502

  CCH Reference - 2009FED ¶33,168.721

  CCH Reference - 2009FED ¶43,360.35

  Tax Research Consultant

  CCH Reference - TRC CONSOL: 39,306

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  As previously reported (TAXDAY, 2009/06/15, S.14), Maine Gov. John Baldacci has signed legislation that changes the basic personal income tax structure. In addition to imposing a flat tax rate for all taxpayers and a surcharge on high-income taxpayers, the legislation repeals the personal exemptions and deductions and replaces them with a new "household credit." In addition, among other things, two more new credits are enacted, some existing credits and special taxes are repealed, and the earned income credit is made refundable. All changes apply to tax years beginning on or after January 1, 2010.

CCH (cch.taxgroup.com) reports:

  An Alaska city's personal property tax on large vessels docking in the city violated the Tonnage Clause of the U.S. Constitution, according to the U.S. Supreme Court, because the tax was based on the value of the vessels, a factor related to tonnage, and it was imposed for general revenue purposes, not for services provided. The Court did not rule on the Due Process Clause and Commerce Clause challenges that were also raised, disappointing observers who had hoped the opinion would illuminate the Court's thinking on controversial apportionment practices, such as throwback and throwout.

CCH (cch.taxgroup.com) reports:

  The Tax Court properly found that the IRS did not abuse its discretion in rejecting the offers-in-compromise of individual partners who had underreported their income in Hoyt partnership tax shelter investments. The IRS considered all of the evidence submitted, and adequately evaluated each offer-in-compromise. The offers-in-compromise were not accepted based on doubt as to collectibility or economic hardship because the taxpayers were capable of paying far more than the amount they offered. Public policy and equity considerations did not demand that the IRS accept the partners' offers on the ground that the taxpayers were victims of fraud or third-party misdeeds. Acceptance of the offers would undermine compliance with the tax laws by encouraging more taxpayers to participate in tax shelters, and would also undermine public confidence in administration of the tax laws. The IRS was also not required to consider the taxpayers' future medical needs, since their evidence regarding such needs was highly speculative.

  Moreover, the delay in determining the individual tax liabilities was due to the complexity of the tax-shelter partnerships and did not require the IRS to abate penalties and interest. Therefore, the IRS was permitted to proceed with its proposed collection actions to recover full payment of the outstanding tax liabilities. Further, the IRS's reliance on an example in the Internal Revenue Manual was not arbitrary or capricious. The IRS also had no legal obligation to consider each of the factors identified in C.G. Fargo , CA-9, 2006-1 USTC ¶50,326, 447 F3d 706, before rejecting the offers-in-compromise.

  However, the Tax Court erroneously determined that it lacked jurisdiction in the partner-level proceedings to determine whether the partnerships' transactions were tax motivated for purposes of Code Sec. 6621(c). Since the IRS included Code Sec. 6621(c) interest in its notices of determination, the Tax Court had jurisdiction to consider the partners' challenge to the amount of their liability, including liability for additional interest penalties. Further, the partnership-level records established that the partners' underpayments were attributable to a tax motivated transaction as defined in Code Sec. 6621(c) because the difference between the claimed value and the adjusted value was attributable to either an overvaluation or sham transaction. Finally, a partner-level determination with respect to whether each partner made the valuation overstatement in good faith was unnecessary because Code Sec. 6621 does not incorporate the discretionary waiver for good faith underpayments in
Code Sec. 6659(e).

  Affirming in part and vacating in part, the Tax Court, 92 TCM 114, Dec. 56,587(M), TC Memo. 2006-166.

M.W. Keller, CA-9, 2009-1 USTC ¶50,428

Other References:

 
Code Sec. 6621

  CCH Reference - 2009FED ¶39,455.58

  CCH Reference - 2009FED ¶39,455.68

 
Code Sec. 7122

  CCH Reference - 2009FED ¶41,130.29

  Tax Research Consultant

  CCH Reference - TRC PENALTY: 9,050
CCH Reference - TRC IRS: 42,056.10
CCH Reference - TRC IRS: 42,056.15
CCH Reference -
TRC IRS: 42,120
CCH Reference - TRC INDIV: 48,352

CCH (cch.taxgroup.com) reports:

  Lawmakers from the Senate Finance Committee and House Committee on Ways and Means have asked IRS Commissioner Douglas H. Shulman to suspend certain penalties assessed on small businesses while Congress works on legislation to address what they term an inequitable and unintended consequence in the tax code. The lawmakers argue that small businesses with investments in listed tax shelter transactions that are generating modest tax benefits have received tax penalties significantly larger than the tax benefits received.

  In a letter dated June 12, the lawmakers requested that Shulman "use the discretion provided to the IRS with its effective tax administration authority to suspend efforts to collect IRC [Internal Revenue Code] section 6707A liabilities ... while Congress acts to remedy this situation." Code Sec. 6707A was enacted in the American Jobs Creation Act of 2004 (P.L. 108-357) as part of a package of provisions intended to help the IRS detect, deter and shut down tax shelters.

  "When I advanced the legislation to shut down tax shelters, I did not intend to bankrupt small businesses that had no ill intent. I was focused on the big corporations that were actively seeking to hide their participation in tax shelters," said Senate Finance Committee ranking member Charles E. Grassley, R-Iowa.

  Treasury regulations require taxpayers to tell the IRS if they invest in "listed" tax shelter transactions, and Code Sec. 6707A imposes large, strict liability penalties on taxpayers who fail to disclose this information to the IRS. For listed transactions, the penalties are $100,000 for natural persons and $200,000 for others, including Subchapter C and Subchapter S corporations. The impacted companies have reported that they were never informed that their transactions were considered abusive tax shelters by the IRS

  Grassley, along with Senate Finance Committee Chairman Max Baucus, D-Mont., Ways and Means Oversight Subcommittee Chairman John Lewis, D-Ga., and ranking member Charles Boustany, R-La., pointed out that the inequitable consequences were unexpected at the time the penalty was enacted, and they plan to introduce legislation that would result in penalty amounts in more reasonable proportion to the tax benefits. They further claimed that while the penalty has helped the IRS end many abusive deals, many of the shelters being examined by the Service involve significantly smaller dollar amounts, and current penalty levels may be excessive in some circumstances.

  "I don't condone investments in tax shelters, but I also want to make sure our small businesses survive and thrive," said Baucus. "It's important we get this done as soon as possible and I urge and expect the IRS to comply with our request." Grassley was even more succinct. "The penalty should be commensurate with the transgression," he said. None of the lawmakers offered a timetable as to when they might advance legislation to change tax code.

  By Jeff Carlson, CCH News Staff

Ways and Means Oversight Subcommittee Press Release: Lawmakers Concerned About Unfair Penalties on Small Businesses

Lawmakers' Letter to IRS Commissioner Shulman
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A Texas Court of Appeals has affirmed a district court's order granting a brochure-fundraising firm's request for injunctive relief to prevent the Texas Comptroller from implementing a new rule that would require the firm to collect and remit sales tax on products sold through school fundraising activities.

  The firm considered its initial sales of fundraising items to school groups as separate from the ultimate sales of the items by the school groups to the end consumers. The firm took the position that its initial sales qualified for exemption (e.g., as sales for resale) and that the school groups were the actual sellers responsible for collecting and remitting any sales tax due on the items.

CCH (cch.taxgroup.com) reports:

  Maine Gov. John E. Baldacci has signed tax reform legislation which makes changes to the personal income tax structure and broadens the sales tax base. Preliminary details are below. Full coverage in Tax Day will follow.

CCH (cch.taxgroup.com) reports:

  President Obama proposed statutory pay-as-you-go (PAYGO) legislation that would require Congress to pay for new mandatory spending increases or tax cuts. The president also met with lawmakers to discuss health care reform legislation, with the goal of passing a final bill that has bipartisan support. The IRS surprised many observers when it announced it is reviewing the substantiation requirements for employer-provided cell phones. The Service also clarified the new motor vehicle state sales tax deduction and temporarily relaxed the filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). IRS officials reviewed the filing season and the wash sale rules.

White House

  The PAYGO bill proposed by President Obama on June 8 (TAXDAY, 2009/06/10, W.1) would apply to legislation enacted through the end of 2013. New costs that Congress fails to pay for would be offset by certain mandatory program cuts ordered by the president.

  The legislation would codify House and Senate PAYGO principles, which were adopted in 2007 but did not have the statutory authority to sequester funding. Medicare payments to physicians, the estate and gift tax; the alternative minimum tax (AMT) and tax cuts enacted in 2001 and 2003 would be exempt from the PAYGO statute. PAYGO principles would apply to health care reform legislation, which must be deficit neutral under the president's plan, according to Office of Management and Budget Director Peter Orszag.

  The president met with key members of the Senate Finance Committee and the Health, Education, Labor and Pensions (HELP) Committee on June 10 to discuss health care reform legislation (TAXDAY, 2009/06/11, W.1). Sen. Christopher Dodd, D-Conn., a leading member of the HELP Committee, said both committees will work in the coming days to "develop a single product." The president has indicated he is willing to consider additional revenue sources, if necessary, to finance health care legislation but has not endorsed any specific measures.

  In addition, President Obama and House Ways and Means Committee Democrats have set an October deadline to pass major health care reform legislation that will lower health care costs, expand primary care and provide wellness coverage (TAXDAY, 2009/06/10, C.1). The president suggested that health care reform could be paid for, in part, by a cap on itemized deductions for wealthier taxpayers, but congressional lawmakers are considering plans to cap the income tax exclusion for employer-provided health insurance.

Congress

  On June 9, Ways and Means Chairman Charles B. Rangel, D-N.Y., along with Energy and Commerce Committee Chairman Henry Waxman, D-Calif., and House Education and Labor Committee Chairman George Miller, D-Calif., released a joint outline of the framework for health care reform. Meanwhile, a June 2 letter written by Joint Committee on Taxation Chief Thomas A. Barthold to Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking member Charles E. Grassley, R-Iowa, included a list of possible revenue offsets that would generate between $51.6 billion and $1.17 trillion over 10 years.

  Baucus told reporters on June 9 that he was looking at possibly using either a 50-50 or 60-40 split between taxes and savings to pay for health care reform. Taxing employer-provided health care benefits remains a viable option to raise revenue and Baucus said he would cap the amount that would be subject to the tax and employ a grandfather clause that would take effect several years down the road at an income level that would not impact a significant number of people. He plans to release draft legislation toward the end of the week of June 15 and hold a markup the following week.

  Baucus and Grassley on June 11 released a legislative staff draft proposal to clarify the types of fuels that qualify for the alternative fuels tax credit and eliminate from eligibility fuel derived from the processing of paper or pulp (TAXDAY, 2009/06/12, C.1). The proposal would close the loophole for "black liquor" fuel produced after the date of enactment.

  The Senate Finance Committee will hold a hearing on June 16 to examine tax treatment of emissions allowances in prospective climate change legislation aimed at reducing greenhouse gas emissions. The hearing, "Climate Change Legislation: Tax Considerations," is the latest in a series of Finance Committee hearings on the tax and trade effects of climate change legislation. Witnesses are expected to include: Gary Hufbauer, the Reginald Jones Senior Fellow of the Peterson Institute for International Economics; Keith Butler, the senior vice president of Tax at Duke Energy; and Mark Price, the principal-in-charge of Financial Institutions and Products at Washington National Tax, KPMG LLP.

IRS

  Cell Phones. The IRS announced that it is revisiting the status of employer-provided cell phones as listed property under Code Sec. 280F (Notice 2009-26; TAXDAY, 2009/06/08, I.1). Listed property expenses are subject to strict substantiation rules, showing the amount of the expense, time and place of the use of the listed property and business purpose of the expense. The IRS indicated it is considering several alternative methods to simplify the substantiation requirements. These include a safe harbor percentage and statistical sampling.

  "Cell phones were added to the category of listed property when they were an exclusive perk of executives," Thomas Ochsenschlager, vice president, AICPA, told CCH. The AICPA has supported legislation in Congress to remove employer-provided cell phones from the category of listed property to reflect their widespread use today, Ochsenschlager explained. The House passed such a bill in 2008 but it failed to make it out of the 110th Congress.

  One important item not addressed in Notice 2009-26 is the use of cell phones for email, Jerry Love, CPA, past president of the Texas Society of CPAs, told CCH. "Most business people have cell phone service to access emails." Additionally, many cell phone plans offer unlimited free local and long-distance calling nights and weekends. Personal use of the cell phone during these hours would appear to not cost the employer anything, Love observed.

  Motor Vehicle Sales Tax Deduction. The temporary motor vehicle sales tax deduction is available to taxpayers in all states, including states without a sales tax, the Treasury Department and the IRS announced (IR-2009-60; TAXDAY, 2009/06/11, I.4). Taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per unit fee.

  Wash Sales. Mark Perwien, special counsel, IRS, told practitioners in Washington, D.C. that the basic structure of the
Code Sec. 1091 wash sales rules has not changed since enactment in 1921 (TAXDAY, 2009/06/11, I.5). Recently added rules, such as those in Code Sec. 1091(e), deal with modern-day derivatives in a piecemeal manner.

  Foreign Corporations. Final, temporary and proposed regulations address the treatment of foreign corporations as surrogate foreign corporations (T.D. 9453,
NPRM REG-112994-06; TAXDAY, 2009/06/10, I.3). The regulations affect mainly domestic corporations or partnerships, certain related parties and certain foreign corporations that acquire substantially all of the properties of such domestic corporations or partnerships.

  Foreign Tax Credit. The IRS issued final regulations on the application of the foreign tax limitation for dividends received from a noncontrolled Code Sec. 902 foreign corporation (T.D. 9452;
TAXDAY, 2009/06/11, I.1). The regulations reflect changes made by the American Jobs Creation Act of 2004 (2004 Jobs Act) (P.L. 108-357) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). The 2004 Jobs Act provided a special look-through rule dividends paid by a 10/50 corporation to a domestic corporation, for dividends paid after 2002, regardless of when the earnings and profits were accumulated.

  Filing Season. David Williams, director, IRS Electronic Tax Administration, reported that online filing grew 20 percent during the filing season (TAXDAY, 2009/06/09, I.2). However, participation in the Free File program dropped, despite as many as 100-million taxpayers being eligible for no-cost filing.

  FBAR. The IRS clarified the filing requirements for Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) (IR-2009-58, Announcement 2009-51; TAXDAY, 2009/06/08, I.5). A recent change in the definition of "United States person" created confusion for filers, the IRS explained. For FBARs due on June 30, 2009, taxpayers should use the prior (July 2000) definition to determine who must file an FBAR.

  "Announcement 2009-51 provides welcome relief relating to who must file an FBAR on or before June 30, 2009," Joseph Calianno, partner, Grant Thornton, LLP, Washington, D.C., told CCH. "The definition of a U.S. person in the 2008 FBAR instructions includes a person in and doing business in the United States. This definition has sparked a great deal of discussion and would treat certain foreign persons, such as nonresident aliens and foreign corporations engaged in certain business activities in the U.S., as U.S. persons for FBAR purposes. As a result, such persons could be required to file an FBAR."

  "The IRS recognized some of the issues posed by this language in the 2008 instructions and the burden that the additional filings would create for the public, and, at least for filings due by June 30, 2009, will permit persons to rely on the definition of U.S. person contained in the instructions of the prior version of the FBAR (the July 2000 version) to determine whether they have an FBAR filing obligation," Calianno noted. "Those instructions defined the term U.S. person to mean a citizen or resident of the U.S., a domestic partnership, a domestic corporation, or a domestic trust or estate."

  By Jeff Carlson, Stephen K. Cooper, Paula Cruickshank and George L. Yaksick, Jr., CCH News Staff

CCH (cch.taxgroup.com) reports:

  The IRS has issued guidance relating to the new qualified plug-in electric drive motor vehicle credit under Code Sec. 30D. The guidance includes the procedures for a vehicle manufacturer to certify that the motor vehicle meets certain requirements that must be satisfied to claim the new qualified plug-in electric drive motor vehicle credit and the amount of the credit allowable for that motor vehicle. It also provides guidance to purchasers of the motor vehicles regarding reliance on the manufacturer's certification in determining whether the credit is allowable for the vehicle and the amount of the credit.

  The credit, as provided in Code Sec. 30D, is equal to the sum of $2,500 plus $417 for each kilowatt hour of traction battery capacity in excess of 4 kilowatt hours. The amount of credit allowed depends on the gross vehicle weight rating. The credit phases out over the second calendar quarter following the calendar quarter in which at least 250,000 qualifying vehicle have been sold for use in the U.S. A credit allowed under Code Sec. 30D means no credit will be allowed for that vehicle under Code Sec. 30.

  The credit applies to qualified vehicles which otherwise meet the requirements of Code Sec. 30D and are placed into service by the taxpayer in a tax year beginning after December 31, 2008, and acquired by the taxpayer on or before December 31, 2009.

  The guidance provides when the certification is permitted by the vehicle manufacturer and when a purchaser may rely on the manufacturer's certification. The content required of the certification is addressed and includes a listing of statements pertinent to the identification and capacity of the vehicle. Special requirements pertain to passenger vehicles, low speed vehicles, and light trucks. The IRS will review and acknowledge the certification presented by a manufacturer. Manufacturers are required to report quarterly, under penalty of perjury, on the number of vehicles sold. Failure by the manufacturer to file a timely report may cause withdrawal by the IRS of the acknowledgment of the manufacturer's certification and purchasers will not be entitled to rely on the manufacturer's certification for purposes of the credit.

Notice 2009-54, 2009FED ¶46,404

Other References:

 
Code Sec. 30D

  CCH Reference - 2009FED ¶4059P.021

  CCH Reference - 2009FED ¶4059P.023

  Tax Research Consultant

  CCH Reference - TRC INDIV: 58,002
CCH Reference - TRC INDIV: 58,008
 

CCH (cch.taxgroup.com) reports:

  The IRS and Treasury Department have provided guidance on the maximum face amount of Recovery Zone Bonds, both Recovery Zone Economic Development Bonds and Recovery Zone Facility Bonds, that may be issued by each state and counties and large municipalities within each state before January 1, 2011, under Code Secs. 1400U-2 and
1400U-3, as provided in Code Sec. 1400U-1. The guidance also provides certain interim guidance for Recovery Zone Bonds that may be relied on pending the promulgation and effective date of future administrative or regulatory guidance.

 
Code Secs. 1400U-1,
1400U-2 and
1400U-3 were enacted under the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) (P.L. 111-5). Recovery Zone Bonds generally provide tax incentives for state and local governmental borrowing at lower borrowing costs to promote job creation and economic recovery that is targeted to areas particularly affected by job losses. The 2009 Recovery Act provides $25 billion for recovery zone bonds: $10 billion for Recovery Zone Economic Development Bonds and $15 billion for Recovery Zone Facility Bonds. The guidance includes a table showing the allocation among the states of national volume caps for both types of Recovery Zone Bonds.

  The guidance also contains interim rules providing that the Code Sec. 148(d) definition of "reasonably required reserve or replacement Fund" shall apply, specifying necessary information reporting associated with Recovery Zone Bonds and defining issuers of Recovery Zone Bonds and entities authorized to allocate volume cap to the ultimate beneficiaries. Moreover, if, under Code Sec. 1400U-1(a)(3)(A), a county or large municipality waives any portion of a volume cap allocation received, it may reallocate the waived volume cap in any reasonable manner. Any state, county, or large municipality that receives a volume cap allocation for Recovery Zone Bonds may make designations of recovery zones in any reasonable manner.

  Allocations of national volume cap for Recovery Zone Bonds are effective for bonds issued on or after February 17, 2009.

Notice 2009-50, 2009FED ¶46,403

Treasury Department News Release, TDNR TG-168, 2009FED ¶46,405

Ways and Means News Release: State, Local Governments to Receive $25 Billion Under Recovery Zone Bond Program

Other References:

 
Code Sec. 1400U-1

  CCH Reference - 2009FED ¶32,520.01

 
Code Sec. 1400U-2

  CCH Reference - 2009FED ¶32,523.01

 
Code Sec. 1400U-3

  CCH Reference - 2009FED ¶32,526.01

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 57,350

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A Massachusetts corporation excise taxpayer's abatement of tax was upheld by the state's highest court, where the tax-free liquidation of a subsidiary by the parent corporation pursuant to IRC Sec. 332 did not result in the disposition of assets for purposes of the parent retaining the state investment tax credit of its liquidated subsidiary. IRC Sec. 332 provides that no gain or loss is to be recognized on the receipt by a corporation of property distributed in a complete liquidation of another corporation. The tax-free liquidation of the subsidiary by the parent was merely a change in form and not in the basis of the assets upon which the investment tax credit was based. The Massachusetts Department of Revenue sought recapture of the investment tax credit because they asserted that the assets underlying the investment tax credit were disposed of before the end of their useful life.

  Subscribers can view the case.

 
Commissioner of Revenue v. The Gillette Company , Supreme Judicial Court of Massachusetts, SJC-10298, June 11, 2009
 

CCH (cch.taxgroup.com) reports:

  The Iowa Department of Revenue has issued guidance regarding Iowa personal income tax return filing, employee tax-exempt benefits, and inheritance tax law for same-sex marriage couples.

  Beginning with tax year 2009, same-sex spouses should file their Iowa income tax returns as married persons, either jointly or separately. Since federal law does not recognize same-sex marriage, same-sex spouses must still file separately for federal tax purposes. For federal purposes, spouses in a same-sex marriage should file either as single filers, or as head of household. For Iowa purposes, same-sex spouses have three options for filing their Iowa income taxes: (1) a married filing jointly Iowa return; (2) a married filing separately Iowa return; or (3) a married filing separately on a combined Iowa return. Same-sex spouses who file their federal taxes as head of household will generally not be eligible to file their Iowa taxes as head of household.

  The federal and state tax treatment of certain employee benefits will also now differ under Iowa law. Because federal law does not recognize same-sex marriage, certain benefits that are tax-exempt when extended to opposite sex spouses and the children of opposite sex spouses will generally be taxable federally when they are provided for same-sex spouses and their children. For Iowa tax purposes, if an employee benefit is tax-exempt when extended to the opposite sex spouse of an employee, or to the children of the spouse, the benefit is tax-exempt when extended to a same-sex spouse or to the children of the spouse.

  The Iowa inheritance tax implications for same-sex spouses are now the same as they are for opposite sex spouses. The vast majority of Iowa's inheritance tax law already uses the term "spouse" rather than husband and wife. Regardless of the terminology, the primary determinant of tax treatment will be based upon the relationship to the decedent; for example, either legally married or not legally married.

  Subscribers may read the text of the guidance:

  Release , Iowa Department of Revenue, June 10, 2009
 

CCH (cch.taxgroup.com) reports:

  The IRS's recent studies in the tax-exempt sector look to "where the money is," Ronald J. Schultz, senior technical advisor, IRS Tax-Exempt and Government Entities (TE/GE) Division, said on June 11. The IRS completed a study of tax-exempt hospitals in February (TAXDAY, 2009/02/13, I.2) and is currently reviewing the activities of tax-exempt colleges and universities (IR-2008-112; TAXDAY, 2008/10/02, I.2). Schultz spoke at the AICPA National Not-for-Profit Industry Conference in Washington, D.C.

Hospitals

  In 2006, the IRS sent questionnaires to more than 500 nonprofit hospitals. The Service used the information from the questionnaires and from audits of some of the hospitals to develop a detailed report on the community benefit standard and executive compensation (IRS Exempt Organizations (TE/GE) Hospital Compliance Project Final Report). At that time, the IRS did not recommend any changes to the community benefit standard that hospitals must meet to be tax-exempt.

  "The diversity we found in the study is very relevant to whether we have a facts and circumstances exemption standard, rather than a bright-line standard," Schultz said. A bright-line exemption standard would be easier for the IRS to administer, he added.

  The Service may also look at different tests for exemption, Schultz indicated. The activities of a teaching hospital, for example, may be different from the work of a hospital that is the only medical facility in a small town.

  Hospitals, colleges and universities are among the wealthiest exempt organizations. In May, Senate Finance Committee ranking member Charles E. Grassley, R-Iowa, called for an overhaul of the tax exemption for nonprofit hospitals. "As we talk about the tax incentives for health insurance, I want us to also consider the billions of dollars of tax benefits conferred to nonprofit hospitals." Grassley has also urged lawmakers to revisit the exemption status of nonprofit colleges and universities.

Colleges

  In October 2008, the IRS sent compliance questionnaires to more than 400 private and public colleges and universities (TAXDAY, 2008/10/02, I.2). The IRS is requesting information about endowments, executive compensation and unrelated business income. "The college study asks for more details about executive compensation than the hospital study," Schultz said. The Service anticipates issuing an interim report on its college study by the end of 2009.

  "We are trying to do examinations in the study that will not be traditional examinations," Schultz said. "In the executive compensation area, we will look for excess compensation and also learn about comparability studies."

Form 990

  In other news, Schultz said that practitioners can expect few changes in the 2009 Form 990, Return of Organization Exempt from Income Tax. The 2008 Form 990 reflected a major overhaul of the form (TAXDAY, 2008/12/29, I.2).

  "We get a lot of Form 990 questions," Schultz said. "People are not reading the instructions." In response, the Service has posted frequently asked questions (FAQs) about Form 990 on its website (www.irs.gov). Additional FAQs covering related groups and many of the schedules for Form 990 will be posted in the future.

  By George L. Yaksick, Jr., CCH News Staff

IRS Form 990, Part VI - Governance, Management, and Disclosure, Frequently Asked Questions and Tips

IRS Form 990 Part VII and Schedule J - Reporting Executive Compensation, Frequently Asked Questions and Tips
 

CCH (cch.taxgroup.com) reports:

  Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking member Charles E. Grassley, R-Iowa, on June 11 released a legislative staff draft proposal to clarify the types of fuels that qualify for the alternative fuels tax credit and eliminate from eligibility fuel derived from the processing of paper or pulp. The proposal would close the loophole for "black liquor" fuel produced after the date of enactment.

  The proposal comes in response to reports that paper mills have been adding diesel fuel to "black liquor," a byproduct of the paper-making process, in order to qualify for the tax credit for biomass-based fuel under Code Sec. 6426 (TAXDAY, 2009/04/24, C.1).

  Passed originally as part of the 2005 highway bill, the alternative fuels tax credit consists of a 50-cent per gallon refundable credit for a range of fuels, including liquefied petroleum gas, compressed or liquefied natural gas, liquefied hydrogen, liquid fuel derived from coal and biomass-based fuel. The purpose of releasing the preliminary draft is to obtain stakeholder input on issues including those related to the legislation's effective date, the definition of "black liquor" and the means of closing the loophole.

  "This credit was not meant to provide a boon to companies for a process they've already been doing for several decades," said Baucus in a statement. "Our measure ensures this tax credit is used consistently as the law intended, not through an unintended loophole."

  By Jeff Carlson, CCH News Staff

Senate Finance Committee Release: Baucus, Grassley Release Staff Draft of Legislation to Close Alternative Fuels Tax Credit Loophole

Senate Finance Committee Preliminary Draft of Prohibition on Alternative Fuel Credit and Alternative Fuel Mixture Credit for Black Liquor
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Legislation has been enacted that phases-in the personal income tax rate reductions enacted by H.B. 441, Laws 2009 (TAXDAY 2009/06/03, S.32), phases-in and modifies the personal income tax capital gains deduction amendments made by H.B. 441, and enacts a new research and development credit against personal and corporate income taxes. A separate story discusses the sales and use tax provisions enacted by the legislation. (TAXDAY, 2009/06/11, S.18)

CCH (cch.taxgroup.com) reports:

  Proposed legislation would, if enacted, increase the Oregon corporation excise (income) tax rate, increase the minimum corporation excise tax rate, impose a minimum tax on S corporations and partnerships, and increase various filing fees.

CCH (cch.taxgroup.com) reports:

  As a growing number of U.S. households make the switch from landlines to mobile phones, congressional lawmakers are looking at ways to stop state and local governments from using the switch to boost their tax revenues. At a hearing of the U.S. House Judiciary Subcommittee on Commercial and Administrative Law on June 9, lawmakers heard support from industry experts for the Cell Tax Fairness Act of 2009 (H.R. 1521). (TAXDAY, 2009/03/19, S.1) Introduced by Rep. Zoe Lofgren, D-Calif., the bipartisan measure has already drawn 112 cosponsors. Similar legislation was introduced in the U.S. Senate on June 4. (TAXDAY, 2009/06/10, S.2) The bill seeks to stop states from increasing cell phone tax rates above general business tax rates. State and local governments are able to raise cell phone tax rates, the bill's sponsors say, simply because cell phone users are less likely to understand or complain about taxes and other fees that are "hidden" in their monthly bills.

  A panel of state experts appearing before the subcommittee made generally favorable remarks about the legislation, but was hard pressed to give examples of other areas that state governments could tax in order to make up revenue foregone as the result of a moratorium on increases in cell phone taxation. However, the experts maintained that cell phone taxes, as they are currently imposed, regressively affect those earning between $20,000 and $40,000, who use their phones for Internet access rather than cable or digital subscriber line services. Wireless services are a necessity and should not be taxed at 18%, like alcohol and tobacco, said Indiana State Rep. Mara Candelaria Reardon.

  Rep. Melvin Watt, D-N.C., said he did not believe that cell phones are being unfairly taxed. He questioned whether the taxation of mobile phones is any different from the taxation of landlines. Simply having different rates between telecommunications services and other general services is not evidence of discriminatory taxation, he said. Another argument raised by Don Stapley, who sits on the Maricopa County (Arizona) Board of Supervisors, was that H.R. 1521 is an example of inappropriate federal preemption of state law. States and localities should be free to adjust their revenues without interference from Congress, he told lawmakers.

  By Stephen K. Cooper, CCH News Staff

Hearing, U.S. House Judiciary Subcommittee on Commercial and Administrative Law, June 9, 2009
 

CCH (cch.taxgroup.com) reports:

  The Justice Department filed an indictment on June 8 charging seven individuals, three former shareholders of a law firm, the former CEO and a former tax partner of a national accounting firm and two former foreign bankers, with tax fraud, conspiracy and related crimes arising out of tax shelters promoted by the law firm, accounting firm and bank. According to the indictment, filed in a federal district court in Manhattan, the seven defendants, and unnamed coconspirators, participated in a scheme to defraud the IRS by designing, marketing, implementing and defending fraudulent tax shelters, which were used by wealthy individuals with multimillion-dollar taxable income in order to eliminate or reduce the taxes they would have to pay the IRS. Details about the allegations can be found on the Department of Justice website at http://www.usdoj.gov/opa/pr/2009/June/09-tax-569.html.

CCH (cch.taxgroup.com) reports:

  The IRS and the Treasury Department have announced that a tax break for the purchase of new motor vehicles is available in states that do not have a state sales tax. Pursuant to the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), qualifying taxpayers who buy a new motor vehicle this year may generally deduct state or local sales or excise taxes paid on the purchase.

  According to the IRS, purchases made in states without a sales tax can also qualify for the deduction. Taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle's sales price or as a per unit fee.

  Other requirements apply, of course, in order to qualify for the deduction. For example, modified adjusted gross income phaseouts apply, and the vehicle must be purchased after February 16, 2009, and before January 1, 2010. The deduction is limited to fees or taxes paid on up to $49,500 of the purchase price a qualified new car, light truck, motor home or motorcycle.

IR-2009-60,
2009FED ¶46,399

Other References:

 
Code Sec. 164

  CCH Reference - 2009FED ¶9502.0385

  CCH Reference - 2009FED ¶9502.35

  CCH Reference - 2009FED ¶9502.70

  CCH Reference - 2009FED ¶9602.7244

  CCH Reference - 2009FED ¶9602.87

  Tax Research Consultant

  CCH Reference - TRC INDIV: 45,104.15

CCH (cch.taxgroup.com) reports:

  The Treasury and IRS have issued final regulations regarding the application of the separate foreign tax credit limitation for dividends received from a noncontrolled Code Sec. 902 foreign corporation (10/50 corporation). The regulations reflect changes made by the American Jobs Creation Act of 2004 (P.L. 108-357) and the Gulf Opportunity Zone Act of 2005 (P.L. 109-135). The regulations are effective on June 11, 2009.

  The American Jobs Creation Act provided that special look-through treatment applied to dividends paid by a 10/50 corporation to a domestic corporation, for dividends paid after 2002, regardless of when the earnings and profits were accumulated. A special transitional rule allowed taxpayers to elect out of the retroactive application of the look-through rules. Specifically, a taxpayer could elect not to have the look-through rules apply to tax years of a 10/50 corporation beginning after December 31, 2002, and before January 1, 2005.

  Under the regulations, dividends paid by a 10/50 corporation to a domestic corporation that meets the stock ownership requirements are treated as income in a separate category in proportion to the ratio of earnings and profits of the 10/50 corporation attributable to each category to total earnings and profits of the 10/50 corporation. Additionally, if the look-through character of the dividend is not substantiated to the satisfaction of the IRS, the dividend is treated as passive income, if the IRS determines that the look-through character of the dividend cannot reasonably be determined based on available information. The dividend will also be treated as passive income if it is received or accrued by a domestic shareholder or paid by a foreign corporation that does not meet the stock ownership requirements in Code Sec. 902.

  CCH Comment. The temporary regulations provided that if the taxpayer failed to substantiate the dividend treatment, the IRS could, without further action, treat the dividend as passive income. The rule was changed to conform to the rule that applies for inadequate substantiation under the transition rules for the treatment of non-look-through pools of a 10/50 corporation or controlled foreign corporation (CFC) in post-2002 tax years in Reg. §1.904-7(f)(4)(iii).

  The resourcing rules that require the resourcing of certain foreign source income of U.S.-owned foreign corporations also apply to 10/50 corporations that meet the definition of a U.S.-owned foreign corporation. The final regulations include a new rule for resourcing subpart F inclusions of a U.S. shareholder under Code Sec. 951(a)(1)(A) or PFIC inclusions under Code Sec. 1293 of a domestic corporate shareholder of a 10/50 corporation that is a qualified electing fund.

Transition Rules

  Under transition rules, any undistributed earnings and foreign taxes in non-look-through pools of a 10/50 corporation that were accumulated and paid as of the end of the 10/50 corporation's last pre-2003 tax year are treated as if they were accumulated and paid during a period in which a distribution would be eligible for look-through treatment. This requires that the taxpayer make a reasonable and good faith effort to reconstruct the non-look-through pools of earnings and taxes. Reconstruction is based on reasonably available books and records and other relevant information.

  Under a safe harbor method, a taxpayer may reconstruct the non-look-through pools using the same percentages the taxpayer uses to properly characterize the stock of the 10/50 corporation in the separate categories for purposes of apportioning the taxpayer's interest expense in its first tax year ending after the first day of the 10/50 corporation's first post-2002 tax year. The final regulations include guidance on how the safe harbor method election is made and the time frame for making the election.

  A taxpayer can choose to use the safe harbor method on either the timely filed or amended tax returns or during audit. If it is chosen on an amended return or during an audit, appropriate adjustments to eliminate any duplicate benefits arising from the application of the safe harbor method to tax years that are not open for assessment must be made. The taxpayer simply employs the safe harbor method, no separate statement is required. The final regulations also clarify that the safe harbor method is only available as a transition rule for taxpayers who were required to characterize stock of the foreign corporation for purposes of apportioning interest expense in the taxpayer's first tax year ending after the first day of the foreign corporation's first post-2002 tax year. The safe harbor does not apply to determine the treatment of earnings accumulated by a foreign corporation that did not have a shareholder entitled to look-through treatment in that year.

  The regulations also extend look-through treatment to dividends paid out of earnings and profits accumulated in non-look-through periods during which the 10/50 corporation or a CFC had no qualifying shareholder (pre-acquisition earnings) and do not restrict look-through treatment of dividends paid to a new qualifying shareholder of an existing 10/50 corporation. Overall foreign loss accounts (OFLs) and separate limitation loss (SLL) accounts in a separate category for 10/50 dividends are recaptured in subsequent years out of income in the same separate categories in which the stock of the 10/50 corporation is characterized for purposes of apportioning interest expense for the first tax year ending after the first day of the 10/50 corporation's first post-2002 tax year.

Accounting Elections, Etc.

  For purposes of the accounting elections under Code Sec. 964, the majority corporate shareholder of a 10/50 corporation may make an election, adopt a method of accounting or tax year or change a method of accounting or tax year on behalf of the 10/50 corporation. The same actions may be taken by the controlling U.S. shareholders of a CFC. The final regulations simplify the final regulations by providing that where a U.S. shareholder changes a method of accounting or tax year on behalf of a CFC of which it is a sole shareholder. the shareholder is not required file the statement required to be filed with each domestic shareholder's tax return, if the information that would otherwise be required is included in Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, Form 3115, Application for Change in Accounting Method or Form 1128, Application to Adopt, Change or Retain a Tax Year. Finally, the final regulations provide that adjustments to the appropriate separate categories of earnings and profits must be made under Code Sec. 481 to prevent the duplication or omission of amounts attributable to previous years that would otherwise result in a change in accounting. The details of the adjustment are found in Rev. Proc. 2008-52, I.R.B. 2008-36, 587.

T.D. 9452, 2009FED ¶47,022

Other References:

 
Code Sec. 861

  CCH Reference - 2009FED ¶27,139C

  CCH Reference - 2009FED ¶27,140

  CCH Reference - 2009FED ¶27,142C

  CCH Reference - 2009FED ¶27,143

 
Code Sec. 902

  CCH Reference - 2009FED ¶27,840C

  CCH Reference - 2009FED ¶27,840CA

 
Code Sec. 904

  CCH Reference - 2009FED ¶27,881

  CCH Reference - 2009FED ¶27,883

  CCH Reference - 2009FED ¶27,883A

  CCH Reference - 2009FED ¶27,885

  CCH Reference - 2009FED ¶27,885A

  CCH Reference - 2009FED ¶27,886

  CCH Reference - 2009FED ¶27,886D

  CCH Reference - 2009FED ¶27,888

  CCH Reference - 2009FED ¶27,888D

  CCH Reference - 2009FED ¶27,892

  CCH Reference - 2009FED ¶27,900

  CCH Reference - 2009FED ¶27,900A

 
Code Sec. 964

  CCH Reference - 2009FED ¶28,711

  CCH Reference - 2009FED ¶28,712

 
Code Sec. 989

  CCH Reference - 2009FED ¶28,922

  Tax Research Consultant

  CCH Reference - TRC INTLOUT: 6,204

CCH (cch.taxgroup.com) reports:

  President Obama on June 10 met with key members of the Senate Finance Committee and the Health, Education, Labor and Pensions (HELP) Committee to discuss health care reform legislation with the goal of passing a final bill that has bipartisan support. Following the White House meeting, Sen. Christopher Dodd, D-Conn., a leading member of the HELP Committee, said both committees will work in the coming days to "develop a single product."

  Senate Finance Committee Chairman Max Baucus, D-Mont., stressed that "we are all flexible," including on an implementation date of any possible health care financing options. Baucus said the federal lawmakers are taking a "practical and pragmatic" approach to crafting legislation.

  According to Sen. Charles E. Grassley, R-Iowa, ranking member of the tax-writing panel, the president indicated he is flexible about the components in a health care measure. However, Grassley expressed misgivings about calling support for a final measure "bipartisan" if it only draws the approval of a handful of Republicans.

  Sen. Michael Enzi, R-Wyo., ranking member of the HELP committee, said he is concerned about the time line for finishing a bill and how it will be paid for. Baucus and Dodd hope to have a final bill sent to the president by October. White House Press Secretary Robert Gibbs said the president is "anxious to let the legislative process work" and pleased that the committees drafting legislation appear to be making progress.

  Taxing employer-provided health care benefits remains a viable option for both Obama and Congress, although Baucus has said he would cap the amount that would be subject to the tax. He also told reporters on June 9 that he is looking at possibly using either a 50-50 or 60-40 split between taxes and savings to pay for the bill. Baucus said he would mitigate the costs to beneficiaries through a grandfather clause that would take effect several years down the road and at an income level that would not impact a significant number of people. The senior tax writer plans to release draft legislation toward the end of the week beginning on June 15 and hold a markup the following week.

  In a related matter, HELP Committee Chairman Edward M. Kennedy, D-Mass., released that committee's draft version of health care reform legislation, the "Affordable Health Choices Act." The measure provides health care tax credits for low and moderate income individuals to purchase health insurance, credits for small businesses that make contributions to employee health insurance, and credits for long term care health insurance. The HELP Committee is slated to begin a markup on June 16.

  By Jeff Carlson and Paula Cruickshank, CCH News Staff

Tax-Related Title of Affordable Health Choices Act
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  A Texas Court of Appeals has upheld a district court's ruling that the state's $5-per-customer admission tax imposed on sexually oriented businesses violated the First Amendment to the U.S. Constitution and was therefore invalid. Applying a strict scrutiny analysis, the court held that the tax was a content-based tax that the Texas Comptroller failed to show was necessary to serve a compelling state interest.

  The Comptroller conceded that the tax could not survive a strict scrutiny analysis and argued instead that the tax was content-neutral and therefore subject to intermediate scrutiny. However, even under an intermediate-scrutiny standard, the tax would fail constitutional muster because it was not narrowly tailored to further a substantial governmental interest.

CCH (cch.taxgroup.com) reports:

  The Minnesota Tax Court has determined that the Commissioner of Revenue properly disregarded intercompany transactions between a taxpayer and two subsidiaries because they lacked economic substance or business purpose and were created solely to avoid Minnesota corporate franchise taxes.

  HMN Financial, Inc., Home Federal Savings Bank (HF Bank), Osterud Insurance Agency, Inc., and Home Federal REIT, Inc. (collectively, "HMN") were part of a unitary business that filed a Minnesota combined report for the tax years at issue. HF Bank created HF REIT and Home Federal Holding, Inc. ("HF Holding") in February 2002. HF Holding was treated as a foreign operating corporation ("FOC") under Minnesota law and was not included in HMN's combined reports for Minnesota tax purposes. In the case at hand, the taxpayer created a captive real estate investment trust (REIT) structure in which the REIT would get a 100% dividends paid deduction; the holding company would be excluded from the unitary group for tax purposes as a FOC; and the Bank would get an 80% dividends received deduction. This sophisticated tax avoidance plan allowed the taxpayer to evade nearly all Minnesota tax liability.

  HMN argued that because HF Holding met the literal definition of a FOC, the Commissioner could not disallow its transactions. However, Minnesota statutes pertaining to FOCs indicate the opposite. Under Minn. Stat. 290.34(1), the Commissioner may review transactions when a corporation deals in the commodities or services of a related corporation in a manner that creates a loss or improper net income or reduces the taxable net income attributable to the state. Despite HMN's argument that this statute is only operable as a fair pricing statute, the Tax Court held that it applies to more than buyers and sellers. Applying the statute, the Tax Court found that the necessary corporate ownership was present and that HF REIT and Holding dealt in the commodities or services of HF Bank. Additionally, Minn. Rule 8034.0100 permits the Commissioner to determine reasonable taxable net income and disregard devices commonly employed to distort income. As such, the Commissioner possessed the requisite authority to review the captive REIT transactions in their entirety to determine if they were a sham or lacking in economic substance.

  Minnesota courts apply the economic substance doctrine, which permits the disallowance of transactions that lack practical, economic effects beyond the creation of tax benefits, to test whether a taxpayer's challenged arrangements undermine Minnesota's tax policy. While HMN asserted that there were legitimate business purposes other than the avoidance of tax, including helping the bank meet or exceed performance goals, compete with other banks, and enhance employee retention, the Tax Court held that the only business reason asserted for establishing the captive REIT was the avoidance of tax. HMN never attempted to raise capital, did not increase its net income through captive REIT transactions, did not treat new entities or transactions in a normal business fashion, and dissolved both the REIT and the holding company when the Minnesota legislature changed the FOC requirements by increasing the payroll and property limits. In light of this evidence, the Tax Court determined the purported business purposes of the REIT to be a pretext and the only genuine reason for the transactions to be an avoidance of Minnesota taxes.

HMN Financial, Inc. and Affiliates v. Commissioner of Revenue , Minnesota Tax Court, No. 7911-R , May 27, 2009, ¶203-469

  Other References:

  Explanations at ¶10-360

CCH (cch.taxgroup.com) reports:

  A subsidiary's transfer of assets to a newly formed partnership in exchange for a majority partnership interest did not result in a constructive distribution that would require gain recognition by the corporate parent under Code Sec. 311(b). Since the majority partnership interest received by the subsidiary was worth less than the assets it contributed to the partnership, a gratuitous transfer of partnership interests to the minority partners was assumed to have been made. However, the assumed gratuitous transfer did not constitute a constructive distribution of appreciated property by the corporate parent to its shareholder trusts, despite the identity of interests between the trust beneficiaries and the minority partners. The primary purpose of the transfer was not to provide an economic benefit to the minority partners and, derivatively, to the shareholder trusts because the assumed gratuitous transfer was unintentional and was not beneficial to the shareholder trusts.

Cox Enterprises, Inc. & Subsidiaries, TC Memo. 2009-134, Dec. 57,852(M)

Other References:

 
Code Sec. 311

  CCH Reference - 2009FED ¶15,554.25

  Tax Research Consultant

  CCH Reference - TRC CCORP: 6,152

CCH (cch.taxgroup.com) reports:

  The Tax Court had jurisdiction to hear a petition to redetermine IRS's determination of a tax deficiency and the imposition of an accuracy-related penalty under Code Sec. 6662 against a married couple who were disallowed a loss stemming from the husband's ownership interest in his single-member limited liability company (LLC) that, in turn, owned an interest in a partnership. The notice of deficiency stated that the taxpayers had no basis in the LLC and that the taxpayers were not at risk. The notice was not issued prematurely as contended, and the affected items set forth in the notice were affected items that required determinations at the partner level, including the imposition of an accuracy-related penalty. The IRS issued the notice of deficiency within the three-year limitation period and the notice was valid because the IRS opted not to commence a partnership-level proceeding and was, therefore, not required to issue a final partnership administrative adjustment to the partnership before issuing the notice of deficiency to the taxpayers.

A. Meruelo, 132 TC No. 18, Dec. 57,848

Other References:

 
Code Sec. 465

  CCH Reference - 2009FED ¶21,893.32

 
Code Sec. 704

  CCH Reference - 2009FED ¶25,124.465

 
Code Sec. 6662

  CCH Reference - 2009FED ¶39,654.45

 
Code Sec. 7442

  CCH Reference - 2009FED ¶42,058.12

  CCH Reference - 2009FED ¶42,058.1535

  Tax Research Consultant

  CCH Reference - TRC PART: 60,302
CCH Reference -
TRC PART: 60,558
 

CCH (cch.taxgroup.com) reports:

  The IRS has issued final, temporary and proposed regulations under Code Sec. 7874 addressing the treatment of foreign corporations as surrogate foreign corporations. The regulations affect mainly domestic corporations or partnerships (and certain parties related to them) and certain foreign corporations that acquire substantially all of the properties of such domestic corporations or partnerships. The regulations are effective on June 12, 2009.

Background

  A foreign corporation is generally treated as a surrogate foreign corporation under Code Sec. 7874(a)(2)( if pursuant to a plan or a series of related transactions (1) the foreign corporation completes the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation; (2) after the acquisition, at least 60 percent of the stock (by vote or value) of the foreign corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; and (3) after the acquisition, the expanded affiliated group, as defined in Code Sec. 7874(c)(1), that includes the foreign corporation does not have substantial business activities in the foreign country in which, or under the law of which, the foreign corporation is created or organized, when compared to the total business activities of the expanded affiliated group. Similar provisions apply to transactions involving the acquisition by a foreign corporation of substantially all of the properties constituting a trade or business of a domestic partnership. The level of ownership in the surrogate foreign corporation by former shareholders of the domestic corporation or former partners in the domestic partnership determines the treatment of the transaction.

  In June 2006, the IRS issued temporary regulations (T.D. 9265) concerning the treatment of a foreign corporation as a surrogate foreign corporation, along with proposed regulations cross-referencing the temporary regulations (NPRM REG-112994-06 ). In July 2006, the IRS issued Notice 2006-70, 2006-2 CB 252, announcing that the effective date in Temporary Reg. §1.7874-2T(j) would be amended for certain acquisitions initiated prior to December 28, 2005. After considering the comments received on these regulations, the IRS has decided to withdraw the 2006 temporary regulations and the related proposed regulations and to replace them with the present temporary and proposed regulations.

Temporary Regulations

  Stock held by a partnership. The temporary regulations modify the rule of Reg. §1.7874-1(e) to apply only for purposes of determining whether the ownership condition of Code Sec. 7874(a)(2)((ii) is satisfied and provide other partnership look-through rules.

  Indirect acquisition of properties. The temporary regulations retain the 2006 temporary rules on indirect acquisitions of properties held by a domestic corporation and clarify that the identified transactions do not represent an exclusive list of transactions that constitute indirect acquisitions. The temporary regulations also clarify that the acquisition of an interest in a partnership is an indirect acquisition of a proportionate amount of the properties of the partnership for purposes of Code Sec. 7874(a)(2)((i).

  The temporary regulations also retain and modify the rule under which a foreign issuing corporation is treated as acquiring a proportionate amount of the stock or assets of a domestic corporation in the case where such stock or assets are acquired by another corporation in exchange for stock of the foreign issuing corporation, which directly or indirectly owns more than 50 percent of the stock (by vote or value) of the acquiring corporation after the acquisition. First, this rule is modified to apply if the acquiring corporation and the foreign issuing corporation are members of the same expanded affiliated group after the acquisition. Second, the rule is modified to apply to an acquisition of a partnership's properties. Finally, the rule is modified to apply if a partnership acquires properties of a domestic corporation or partnership in exchange for stock of a foreign issuing corporation, but only if the foreign issuing corporation and the partnership would be members of the same expanded affiliated group after the acquisition if the partnership were a corporation.

  Acquisitions by multiple foreign corporations and acquisitions of multiple domestic corporations. To address acquisitions by multiple foreign corporations intended to avoid Code Sec. 7874, the temporary regulations provide that if pursuant to a plan or a series of related transactions, two or more foreign corporations complete, in the aggregate, an acquisition described in Code Sec. 7874(a)(2)((i), then each foreign corporation will be treated as completing the acquisition for purposes of determining whether such a foreign corporation will be treated as a surrogate foreign corporation. With respect to acquisitions of multiple domestic corporations or partnerships, the temporary regulations clarify that if a foreign corporation completes more than one such acquisition pursuant to a plan or a series of related transactions, then, for purposes of Code Sec. 7874(a)(2)((ii), the acquisitions will be treated as a single acquisition and the domestic corporations and/or domestic partnerships will be treated as a single entity.

  "By reason of" standard. The temporary regulations clarify that the "by reason of" condition of Code Sec. 7874(a)(2)((ii) is satisfied if stock of a foreign corporation is received in exchange for, or with respect to, stock in a domestic corporation or an interest in a domestic partnership. This includes a taxable or nontaxable distribution. The "by reason of" condition may be satisfied other than through exchanges or distributions. In addition, the "by reason of" standard applies based on the amount of stock of the foreign corporation received in exchange for, or with respect to, the stock of the domestic corporation or interest in the domestic partnership. This determination is based on the relative values of the stock of the domestic corporation or interest in a domestic partnership and any other property exchanged for the stock of the foreign corporation.

  Substantial business activities condition. The temporary regulations do not retain the safe harbor for determining if the substantial business activities condition of Code Sec. 7874(a)(2)((iii) is satisfied or the examples illustrating the general rule provided by the 2006 temporary regulations. Thus, taxpayers can no longer rely on such safe harbor or the examples; instead, they must apply the general rule to determine whether the substantial business activities condition is satisfied. The temporary regulations also add to the items not taken into account in determining whether the substantial business activities condition is satisfied any assets, business activities or employees located in the foreign country in which the foreign acquiring corporation is created or organized if such assets, business activities or employees are transferred to another country pursuant to a plan in existence at the time of the acquisition. In addition, for purposes of the substantial business activities condition, a member of the expanded affiliated group that holds at least a 10-percent capital and profits interest in a partnership will take into account its proportionate share of the items of the partnership, including business activities, employees, assets, income, and sales.

  Publicly traded foreign partnerships. The temporary regulations also clarify that, for purposes of Code Sec. 7874, a foreign partnership is treat as a foreign corporation if the partnership would, but for
Code Sec. 7704(c), be treated as a corporation under Code Sec. 7704(a) at the time of the Code Sec. 7874(a)(2)((i) acquisition, or at any time after the acquisition pursuant to a plan that existed at the time of the acquisition. A publicly traded foreign partnership treated as foreign corporation under this rule is treated as a foreign corporation for all purposes of Code Sec. 7874.

  Options and similar interests. Under the temporary rules, for purposes of Code Sec. 7874, an option or similar interest in a domestic corporation or a domestic or foreign partnership will be treated as stock of the domestic corporation or an interest in the partnership with a value equal to the holder's claim on the equity of the domestic corporation or partnership immediately before the Code Sec. 7874(a)(2)((i) acquisition. An option or similar interest in a foreign corporation will generally be treated as stock of the foreign corporation with a value equal to the holder's claim on the equity of the foreign corporation immediately after the acquisition. These rules will not generally apply to the extent that treating an option or similar interest as stock of a corporation or an interest in a partnership would duplicate, in whole or in part, a shareholder's or partner's claim on the equity of the corporation or partnership.

  Economically equivalent interests. To address certain transactions intended to avoid Code Sec. 7874 that involve interests substantially equivalent to equity interests in foreign corporations, the temporary regulations provide that, for purposes of Code Sec. 7874, any interest, including stock or a partnership interest, that is not otherwise treated as stock of a foreign corporation will be treated as stock of the foreign corporation if the following two conditions are satisfied: (1) the interest entitles the holder to distribution rights that are substantially similar in all material respects to the distribution rights entitled to a shareholder of the foreign corporation by reason of holding stock in the foreign corporation; and (2) treating the interest as stock of the foreign corporation has the effect of treating the foreign corporation as a surrogate foreign corporation.

  Insolvent entities. The temporary regulations clarify that, for purposes of Code Sec. 7874, if immediately prior to the first date, properties are acquired as part of a Code Sec. 7874(a)(2)((i) acquisition, a domestic corporation is in a title 11 or similar case or the liabilities of the domestic corporation exceed the value of its assets, then any claim by a creditor against the domestic corporation will be treated as stock of the domestic corporation. A similar rule applies with respect to a domestic or foreign partnership. A creditor that is treated as a shareholder of a domestic corporation or as a partner in a partnership is treated as a shareholder or partner for all Code Sec. 7874 purposes.

  Modification to the internal restructuring exception. The IRS will issue regulations addressing the application of the internal group restructuring exception in Reg. §1.7874-1(c)(2) to certain divisive transactions. The regulations may apply to acquisitions completed on or after June 9, 2009.

  Effective and applicability dates. The temporary regulations generally apply to acquisitions completed on or after June 9, 2009. However, taxpayers may apply the temporary regulations to acquisitions completed prior to June 9, 2009, if the temporary regulations are applied consistently to all acquisitions completed prior to that date. The temporary regulations include the modifications announced by Notice 2006-70, 2006-2 CB 252, to the effective date of the 2006 temporary regulations for certain acquisitions initiated prior to December 28, 2005. These regulations will expire on or before June 8, 2012.

  Effect on other documents.
Notice 2006-70, 2006-2 CB 252, is obsolete as of June 9, 2009.

Proposed Regulations

  The text of the temporary regulations also serves as the text of the proposed regulations published simultaneously with the temporary regulations (NPRM REG-112994-06). Written or electronic comments and requests for a public hearing on the proposed regulations must be received by September 7, 2009.

T.D. 9453, 2009FED ¶47,021

Proposed Regulations, NPRM REG-112994-06, 2009FED ¶49,422

Other References:

 
Code Sec. 7874

  CCH Reference - 2009FED ¶43,970

  CCH Reference - 2009FED ¶43,970B

  CCH Reference - 2009FED ¶43,970C

  Tax Research Consultant

  CCH Reference - TRC INTL: 30,082.05

CCH (cch.taxgroup.com) reports:

  President Obama and House Ways and Means Committee Democrats agreed to pass major health care reform legislation by October, the administration announced on June 9. Obama said the upcoming bill, which will lower health care costs, expand primary care and provide wellness coverage, could be paid for in part by a cap on itemized deductions for wealthier taxpayers.

  Ways and Means Chairman Charles B. Rangel, D-N.Y., said Congress will respond to the president's commitment to health care reform. The White House meeting came shortly after Rangel joined with Energy and Commerce Committee Chairman Henry Waxman, D-Calif., and House Education and Labor Committee Chairman George Miller, D-Calif., to release a joint outline of the framework for health care reform.

  According to the framework, the legislation will reduce costs, while preserving the current choice of doctors, hospitals and health plans that many insured Americans currently enjoy. The legislation will also provide affordable health coverage for all Americans, according to the framework. While details of the revenue offsets were not given, the framework mentions a new small business tax credit that will protect firms providing health coverage. In recent weeks, lawmakers and the Obama administration have mulled proposals to cap the income tax exclusion for employer-provided health care.

  Lawmakers are considering several other options to offset the cost of financing major health care reform, according to a June 2 letter written by Joint Committee on Taxation Chief Thomas A. Barthold. Barthold's letter to Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking member Charles E. Grassley, R-Iowa, includes a list of possible revenue offsets that would generate between $51.6 billion and $1.17 trillion over 10 years. Many of the proposals would cause taxpayers to lose their health care coverage unless those losses were mitigated through other health care reform measures, the letter states.

  Barthold's letter estimates that capping and indexing the income tax exclusion for employer-provided health insurance at the amount of the actuarial value of the 2010 standard option of the federal employees health benefit plans would raise $418.5 billion over 10 years. Applying the same cap only to taxpayers earning $100,000 and $200,000 (single and married, respectively) would raise $161.9 billion. Limiting the income exclusion for employer-provided health care to 50 percent of the total premium amount would raise $1.17 trillion; repealing the Code Sec. 213 deduction for medical expenditures over 7.5 percent of adjusted gross income (AGI) would raise $180.7 billion; and eliminating the exclusion for health expenditures made through flexible savings accounts and health reimbursement accounts would generate $68.6 billion. In addition, a proposal to impose a federal excise tax of 3 cents per 12 ounces of certain sugar-sweetened beverages would raise $51.6 billion, while increasing the federal excise tax on alcohol to $16-per-proof gallon for all alcoholic beverages, including beer, wine and spirits, would raise $61.5 billion.

  By Stephen K. Cooper, CCH News Staff

JCT Letter Regarding Health Care Revenue Raisers

House Committees Press Release: House Committees Brief Members on Draft Health Reform Outline

Health Reform Outline: Key Features of the Tri-Committee Health Reform Draft Proposal in the House

Ways and Means Release: Ways and Means Members Discuss Health Reform with President Obama
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Kansas State Court of Tax Appeals denied the Kansas Department of Revenue summary judgment in an action filed by a taxpayer seeking a sales tax refund under the integrated plant theory exemption for machinery and equipment (and associated repair and replacement parts) used in Kansas as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility. The taxpayer argued that the exemption applied with respect to repair and replacement parts for loaders and haulers that it used in its concrete manufacturing operation. The taxpayer quarried limestone on its property and used the loaders and haulers to move the limestone to its adjacent property where it crushed it and manufactured it into concrete. The department contended in its motion for summary judgment that the exemption did not apply because the excavation activities were distinct from the manufacturing activities.

  The court noted that the exemption statute includes within an "integrated production operation" preproduction operations to handle, store, and treat raw materials. In addition, the exemption statute states that machinery and equipment is considered used as an integral or essential part of an integrated production operation when used to receive, transport, convey, handle, treat, or store raw materials in preparation of placement on the production line. Based on the evidence, the court declined to find as a matter of law that the loaders and haulers were not used as part of an integrated production operation.

  The court found that the term "manufacturing or processing plant or facility" means a single fixed location owned or controlled by a manufacturing or processing business that consists of one or more structures or buildings in a contiguous area where integrated production operations are conducted to manufacture tangible personal property for ultimate sale at retail. Because the evidence showed that the quarry and cement manufacturing operations were conducted on adjacent property owned by the taxpayer and not on a right-of-way or easement located on land not owned by the taxpayer, the court declined to find as a matter of law that the loaders and haulers were not primarily used by and at the taxpayer's "plant." In addition, it was irrelevant in determining the boundaries of the "plant" that the loaders and haulers might have performed extraction-related activities on a portion of the grounds where no additional processing (such as the crushing of the limestone) occurred. As a result, the court denied the department's summary judgment motion. However, the court did not enter judgment in favor of the taxpayer, as the department's motion did not address all of the exemption's statutory requirements and the taxpayer still had the burden of proving that the exemption applied.

  Subscribers can view the order denying the department's motion for summary judgment.

 
In the Matter of the Appeal of LaFarge Midwest/Martin Tractor Co., Inc. , Kansas State Court of Tax Appeals, No. 2006-8532-DT, June 4, 2009
 

CCH (cch.taxgroup.com) reports:

  The states' fiscal situation dominated presentations as the Federation of Tax Administrators (FTA) held its 77th annual meeting in Denver, May 31-June 3, 2009. In other developments, the FTA approved several resolutions, received updates on nexus developments and the Streamlined Sales Tax (SST) effort, and elected Cindi Holmstrom, Director of the Washington State Department of Revenue, as its new president.

CCH (cch.taxgroup.com) reports:

  A corporation wholly owned by an individual was denied deductions for claimed net operating losses, allowed claimed bad-debt deductions, partially denied a deduction for professional fees incurred for the benefit of the owner, and the owner was subject to tax on any of the fees for which the deductions were denied. The corporation was involved in many retail and vending businesses, including the sale of coffee and cigarettes. The owner was charged with and convicted of several counts of tax evasion, the defense of which was paid for by the corporation.

  The corporation was not entitled to a deduction for net operating losses under Code Sec. 172 for state tobacco tax refunds it claimed to have accounted for prematurely. The corporation presented no credible evidence that the refunds were ever actually received, as state tax filings did not indicate any offsets or overpayments of taxes. Further, the theory upon which the corporation claimed to be entitled to the refund was not valid under the laws of the state.

  The corporation was entitled to a bad-debt deduction under Code Sec. 166 for amounts owed by the mistress of the corporation's owner. The corporation claimed that the owner transferred assets from the corporation to the mistress to hold in trust to pay to the owner's ex-wife in satisfaction of a divorce settlement. However, the corporation failed to provide credible evidence establishing that this event even occurred and, if it had occurred, that a valid creditor/debtor relationship was established. Nonetheless, the corporation's claim to a bad-debt deduction was upheld because a state court entered a judgment requiring the mistress to pay money to the corporation, and a creditor/debtor relationship was thereby established. In the proceedings for the mistress's bankruptcy petition, the debt was settled for a lesser amount, and the corporation was entitled to a deduction under Code Sec. 166 for the difference.

  The corporation was entitled to deductions, as trade or business expenses under Code Sec. 162, for some of the professional fees incurred by a wholly owned subsidiary corporation in the legal defense of the owner. The corporation was entitled to claim deductions for expenses paid by the subsidiary because the subsidiary understood that it would be reimbursed for the expenses by the corporation, so the corporation was the actual payor of the expenses. Several of the expenses claimed to be incurred as professional fees (specifically, legal fees) were properly disallowed as deductions because the corporation either failed to properly substantiate the expenses or the expenses were incurred solely for the benefit of the corporation's president and sole shareholder. Expenses were found to be solely for the benefit of the individual if the expenses either did not benefit both the individual and the corporation due to the individual's importance to the corporation or if the legal expenses did not arise out of the individual's role with the corporation.

  Any professional expenses paid for the benefit of the corporation's owner and president that were not deductible by the corporation as trade or business expenses constituted constructive dividends to the owner under Code Sec. 301, and he was subject to ordinary tax on the amount of the covered expenses up to the amount of accumulated earnings and profits held by the corporation under Code Sec. 316. Any amounts determined to be dividends in excess of the corporation's earning and profits were taxed as long-term capital gain.

  The corporation was liable for an addition to tax under Code Sec. 6651 for a failure to timely file a return.

  Related cases at 2008-1 USTC ¶50,206; and 2009-1 USTC ¶50,289.

HIE Holdings, Inc., TC Memo. 2009-130, Dec. 57,847(M)

Other References:

 
Code Sec. 162

  CCH Reference - 2009FED ¶8520.588

  CCH Reference - 2009FED ¶8526.4462

 
Code Sec. 166

  CCH Reference - 2009FED ¶10,650.12

  CCH Reference - 2009FED ¶10,650.515

 
Code Sec. 172

  CCH Reference - 2009FED ¶12,014.3095

  CCH Reference - 2009FED ¶12,014.311

  CCH Reference - 2009FED ¶12,014.411

 
Code Sec. 316

  CCH Reference - 2009FED ¶15,704.22

 
Code Sec. 6651

  CCH Reference - 2009FED ¶39,475.23

  Tax Research Consultant

  CCH Reference - TRC CCORP: 6,308

  CCH Reference - TRC BUSEXP: 18,052.10

  CCH Reference - TRC BUSEXP: 45,100

  CCH Reference - TRC BUSEXP: 48,050

  CCH Reference - TRC BUSEXP: 48,300

  CCH Reference - TRC PENALTY: 3,052

CCH (cch.taxgroup.com) reports:

  Related entities taxed as partnerships for federal income tax purposes did not have to provide the IRS with meeting minutes and handwritten notes recording communications with their federally authorized tax practitioner (FATP) about various partnership redemptions. Generally, Code Sec. 7525 provides a limited privilege to communications regarding tax advice between a taxpayer and any FATP. An exception exists, however, for written communications promoting any tax shelter.

  In this case, the meeting minutes did not met the exception to the FATP privilege because the IRS failed to prove that they involved the "promotion" of a tax shelter. The FATP had a long and close relationship with the taxpayers, preparing returns, assisting with tax planning, responding to Federal and State tax officials on their behalf. Advising the taxpayer's with the tax aspects of the redemptions was a regular part of his practice. Moreover, the FATP's employer received no additional fees for any potential savings from the transactions. It was paid for the FATP's advice regarding the transactions as it was for any other service provided by the FATP outside of preparing returns. The written communication promoting tax shelters exception is not meant to adversely affect routine relationships such as the one that existed between the FATP and the taxpayers.

  The IRS was also not entitled to the handwritten notes taken by one of the taxpayer's partners recording confidential communications with the FATP regarding tax advice received while discussing the partnership redemptions. The notes did not constitute a "written communication" under the exception to the FATP privilege as they were not communicated to anyone but merely were a record of the points of the discussion.

  Related decision at 95 TCM 1006, Dec. 57,304(M), TC Memo. 2008-3.

Countryside Limited Partnership, 132 TC No. 17, Dec. 57,846

Other References:

 
Code Sec. 7525

  CCH Reference - 2009FED ¶42,816F.25

  Tax Research Consultant

  CCH Reference - TRC IRS: 21,404

CCH (cch.taxgroup.com) reports:

  The IRS had a very "successful filing season" and experienced "significant growth in e-filing," reported David Williams, director, Electronic Tax Administration and Refundable Credits, IRS. Speaking at the 2009 IRS Software Developers Conference in Arlington, Va., on June 8, Williams was generally upbeat over progress made on e-filing as the IRS continues to make progress toward the 80-percent e-file goal set by Congress.

Online Filing Increases

  Williams reported that there was a 20-percent growth rate in online filing. He attributed the increase to taxpayers becoming "more comfortable interacting electronically" as well as the "elimination of separate e-filing charges."

  The IRS also experienced a growth in online PIN returns, which, Williams revealed, caused a rise in call volume at the IRS because taxpayers were trying to get their adjusted gross income (AGI) so they could file electronically. Nevertheless, the IRS did not see a decline in e-filing because of this change.

Free File Usage Drops

  Williams also reported that the IRS saw a "significant" drop in Free File usage, "despite improvements in the program" and Free File's availability to approximately 100 million taxpayers. Williams theorized that the decline may have been caused by the tax software industry's offer of free products and significant marketing of those products during the filing season. Williams also commented that, with Free File agreements ending in 2009, the IRS will be looking at ways to renegotiate those agreements.

Healthcare Proposals Effect on Tax Administration

  Williams revealed that with the Tax Code's continuing and increasing importance to Congress for serving as "a place to go to enact what used to be spending provisions," the IRS continues to be concerned with how to effectively "administer things that are coming to us, which is mostly refundable credits." He expects that, with healthcare high on Congress's agenda, the IRS and Congress will be examining how to administer the Tax Code's health-care provisions.

Advancing E-file Study

  The IRS Advancing E-file Study is a major effort to collect and analyze all substantial data on the IRS e-file program in order to help the IRS validate and launch future studies, research, and other activities to meet the congressionally set goal of an 80-percent e-file rate. The IRS has completed Phase 1 of the study, which contains various options for e-filing and to increase e-filing by taxpayers. The Phase 1 study is available online.

  Williams said that he plans to internally circulate a draft of the study's second phase within the next month seeking input on the filing options set forth in the draft. Williams could not commit to a public release date of the draft.

  By H. Goehausen, CCH News Staff

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Vermont Legislature has passed legislation that, if enacted, would phase-in the personal income tax rate reductions enacted by H.B. 441, Laws 2009 (TAXDAY 2009/06/03, S.32), phase-in and modify the personal income tax capital gains deduction amendments made by H.B. 441, and enact a new research and development credit against personal and corporate income taxes as well as new sales tax holidays.

CCH (cch.taxgroup.com) reports:

  Both the Maine Senate and House of Representatives have passed a bill that would replace the current personal income tax brackets, personal exemptions, and itemized deductions with a 6.5% flat tax on all taxable income. In addition, the bill would:

  -- create a new "household credit" for low- and middle-income individuals (the credit amount would be adjusted annually for inflation);

  -- add a tax credit for charitable contributions exceeding $250,000;

  -- establish a tax credit for persons who are 65 years of age or older;

  -- eliminate the low-income tax credit;

  -- abolish the alternative minimum tax on individuals;

  -- repeal the 15% tax on lump-sum retirement plan distributions and early distributions from qualified retirement plans;

  -- replace withholding exemptions with a requirement that the household credit be taken into account when determining personal income tax withholding rates; and

  -- require the State Tax Assessor to report to the Joint Standing Committee on Taxation by November 1, 2011, regarding the impact of the changes in the tax laws contained in the bill.

  The proposed changes would apply to tax years beginning on or after January 1, 2010. At press time, Gov. John Baldacci has not indicated whether or not he will sign the bill.

  Provisions in H.P. 750 pertaining to sales and use taxes and property taxes are reported separately. (TAXDAY, 2009/06/08, S.14)

  Subscribers can view the original bill and amendments to the original bill that affect personal income tax provisions.

L.D. 1088 (H.P. 750), as passed by the Maine House of Representatives on June 4, 2009, and passed by the Maine Senate on June 5, 2009
 

CCH (cch.taxgroup.com) reports:

  CCH Tax and Accounting is hosting a live two-hour audio seminar, Multistate Income Taxation: From Allocation and Apportionment to Credits and Incentives, on Tuesday, June 9, 2009, at 1 p.m. Eastern; noon Central; 10 a.m. Pacific. This two-hour CCH Audio Seminar is the second of a three-part series on multistate income taxation presented by noted state tax experts, educators and authors, John C. Healy, M.S.T., CPA, and Bruce Nelson, M.A., CPA. This seminar will identify the concepts and conflicts in disputes over business and nonbusiness income and the connection between those concepts and apportionment and allocation.

  Program topics include the following:

  -- Latest developments in business and nonbusiness income

  -- When does a taxpayer have the right to apportion income?

  -- Sourcing issues

  -- Detailed analysis of the payroll, property, and sales factors

  -- Tax credits and business incentives

  The learning objectives include:

  -- understand the distinctions between business and nonbusiness income

  -- gain awareness of sourcing issues

  -- develop an approach to analyze issues involving payroll, property or sales factors

  Registration can be completed online at
http://www.krm.com/cch or by calling 1-800-775-7654. Participants can receive two hours of CPE credit for an additional $25 per person. Firms registering for this audio seminar will also receive a free issue of CCH's Journal of State Taxation.

CCH (cch.taxgroup.com) reports:

  The IRS has issued guidance concerning the election procedures taxpayers are required to follow in making an irrevocable election to claim the Code Sec. 48 investment tax credit in lieu of the production tax credit under Code Sec. 45 with respect to renewable energy facilities. The guidance further describes the coordination of investment tax and production credits with Treasury Department grants for specified energy property under the American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5), known as "Section 1603 Grants".

  To make the election to treat a qualified facility as a qualified investment credit facility eligible for the investment tax credit, the taxpayer must claim the energy credit with respect to qualified property that is an integral part of the facility on Form 3468, Investment Credit. A separate election is required for each facility that the taxpayer treats as a qualified investment credit facility.

  A statement, signed under penalty of perjury by the taxpayer or someone authorized to bind the taxpayer, must be attached to Form 3468; the statement must include the taxpayer's name, address, taxpayer identification number and telephone number, together with detailed technical descriptions of the facility (including generating capacity) and of the energy property placed in service during the year as an integral part of the facility, including a statement that the property is an integral part of such facility. The attached statement must also state the date the energy property is placed in service, provide an accounting of the taxpayer's basis in such property, an include a depreciation schedule showing the remaining basis in the property after the energy credit is claimed. The taxpayer must also represent that no Section 1603 Grant will be sought for such property The taxpayer must also retain adequate books and records concerning the credit, including the required statement and all supporting documentation.

  Section 1603 Grants are federal grants of up to 30 percent of the cost of qualified facilities (other than small irrigation power facilities and Indian coal production facilities) that are placed into service or on which construction is begun during 2009 or 2010. However, if a Section 1603 Grant is obtained for any tax year with respect to the property then no credit may be determined under Code Secs. 45 or48 with respect to such property for such tax year.

Notice 2009-52, 2009FED ¶46,397

Other References:

 
Code Sec. 45

  CCH Reference - 2009FED ¶4415.30

 
Code Sec. 48

  CCH Reference - 2009FED ¶4671.01

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 54,550

CCH (cch.taxgroup.com) reports:

  The IRS is temporarily suspending the requirement to file foreign bank account reports (FBARs) (Forms TD F 90.22-1, Report of Foreign Bank and Financial Accounts) due on June 30, 2009, for persons who are not citizens, residents, or domestic entities. Form TD F 90.22-1, which was revised in October 2008, changed the definition of "United States person" and resulted in some confusion that may require additional guidance. Therefore, for FBARs due on June 30, 2009, taxpayers should use the prior (July 2000) definition in determining who must file an FBAR. Under that former definition, a "United States person" is (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. Taxpayers required to file an FBAR due on June 30, 2009, should still file the current version of Form TD F 90.22-1. The substitution of the prior definition of "United States person" applies only with respect to FBARs due on June 30, 2009.

  Comments regarding the revised FBAR form and instructions should be submitted by August 31, 2009.

IR-2009-58,
2009FED ¶46,395

Announcement 2009-51, 2009FED ¶46,396

Other References:

 
Code Sec. 6011

  CCH Reference - 2009FED ¶35,141.48

  Tax Research Consultant

  CCH Reference - TRC FILEBUS: 9,104

CCH (cch.taxgroup.com) reports:

  The IRS is requesting public comments on several proposals to simplify the procedures under which employers substantiate an employee's business use of employer-provided cell phones or similar telecommunications equipment. Suggestions for alternative approaches to simplify these substantiation procedures are also being requested. Any resulting changes to the substantiation procedures will not become effective until guidance is published.

  In the event that an employer acquires, and pays the costs of, a cell phone that is provided to an employee, the employee receives a fringe benefit. To the extent that the employee uses the employer-provided cell phone for business purposes, the fair market value (FMV) of such usage qualifies as a working condition fringe benefit excludable from the employee's gross income and deductible by the employer. However, the exclusion/deduction is not available unless the substantiation requirements of
Code Sec. 274(d) are met. In the event that the employee's use of the cell phone is for personal purposes, the FMV of such usage is includible in the employee's gross income. The employer's cost to provide the cell phone is not determinative of the FMV of the benefit received by the employee.

  The IRS and the Treasury Department are considering three alternative methods to simplify the substantiation requirements applicable to employee usage of employer-provided cell phones. It is contemplated that any employer using a simplified cell phone substantiation method will be required to implement a written policy that (1) requires employees to carry and use the employer-provided cell phone in connection with the employer's trade or business, and (2) prohibits personal use of an employer-provided cell phone other than for minimal personal use, similar to the rules currently applicable to employer-provided automobiles in Temporary Reg. §1.274-6T. It is also anticipated that the employer will be required to reasonably believe that the cell phone is not used for other-than-minimal personal use.

  The three alternative substantiation methods being considered by the IRS and Treasury Department are:

  (1) Minimal personal use method. There are actually two proposed "minimal personal use" methods being considered that would allow an employer to treat all of an employee's usage of an employer-provided cell phone as business usage. Under the first proposal, such treatment would be permitted if employees establish that they maintain and use non-employer-provided cell phones for personal purposes during work hours. The second alternative proposal would define a specified amount or type of "minimal" personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone.

  (2) Safe harbor substantiation method. Under this method, an employer would treat a certain percentage of each employee's use of an employer-provided cell phone (75 percent, as proposed) as business usage. The remaining percentage would be treated as personal use.

  (3) Statistical sampling method. This method would allow an employes to use a statistical sampling methodology similar to that provided in Rev. Proc. 2004-29, 2004-1 CB 918, to measure an employee's personal use of an employer-provided cell phone. The remaining portion of the employee's usage would be deemed to be for business purposes.

  The IRS is also soliciting comments as to whether a simplified valuation method would be helpful and appropriate to determine the FMV of an employee's personal use of an employer-provided cell phone. As noted above, in the event that the employee's use of an employer-provided cell phone is for personal purposes or is not properly substantiated under Code Sec. 274(d), the FMV of such usage would be includible in the employee's gross income as a taxable fringe benefit. The employer's cost to provide the cell phone is not determinative of the FMV of the benefit received by the employee.

  Public comments on the proposed substantiation and valuation methods discussed above, as well as suggestions for alternative simplified methods, must be submitted to the IRS on or before September 4, 2009. The notice includes a list of specific issues that the IRS is particularly interested in receiving comments regarding.

Notice 2009-46, 2009FED ¶46,394

Other References:

 
Code Sec. 274

  CCH Reference - 2009FED ¶14,417.027

  CCH Reference - 2009FED ¶14,417.26

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 24,856

Tax Analysts report:

Tax Analysts report:

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Legislation enacts changes to the Vermont seed capital credit and the downtown and village center credit against Vermont personal income, corporate income, bank franchise, and insurance taxes. The bill also makes identical changes to the incentive credit against personal income tax and business solar incentives credits against personal and corporate income tax that were made by H.B. 446, Laws 2009 (see TAXDAY, 2009/06/04, S.37).

CCH (cch.taxgroup.com) reports:

  Legislation has been enacted that decouples the Oklahoma corporate and personal income tax from some of the provisions of the federal American Recovery and Reinvestment Act of 2009 (Recovery Act) (P.L. 111-5), creates a personal income tax exemption for awards for participation in a competitive livestock show event, amends the corporate and personal income tax credit for investment in depreciable property used in manufacturing or aircraft facility, and amends personal income tax withholding semiweekly payment requirements.

CCH (cch.taxgroup.com) reports:

  Missouri legislation has been enacted that expands and otherwise revises a number of corporate and personal income tax credit programs, increases the outstanding shares and surplus threshold used to calculate the annual franchise tax, and makes transportation development district sales tax changes.

CCH (cch.taxgroup.com) reports:

  Congress could debate the future of the federal estate tax this fall, according to speakers at a briefing on the tax in Washington, D.C., on June 4. Douglas Holtz-Eakin, former director of the Congressional Budget Office (CBO) and advisor to presidential candidate John McCain, defended eliminating the estate tax but acknowledged that lawmakers will likely extend or make permanent the current rate and exemption amount.

2009 Rate and Exemption

  Under current law, the federal estate tax is scheduled to expire after 2009 but return after 2010. The federal estate tax would reach 55 percent on estates valued at more than $1 million after 2010.

  The Obama administration has proposed making permanent the 2009 maximum estate tax rate of 45 percent with a $3.5 million exemption ($7 million for married couples) (TAXDAY, 2009/04/30, C.1). The Taxpayer Certainty and Relief Bill of 2009 (Sen 722 ), introduced by Senate Finance Committee (SFC) Chairman Max Baucus, D-Mont., would make these amounts permanent after 2009.

  However, not all Democrats agree with making the 2009 amounts permanent. Some Democrats have expressed support for extending the 2009 exemption amounts two or thee years, rather than making them permanent. Many Republicans support repealing the estate tax, but the GOP lacks the votes in the House or Senate to eliminate the tax entirely.

  The SFC has not yet scheduled a hearing on Baucus'bill. Several lawmakers and congressional staff members have indicated that the SFC may take up the bill in the autumn.

  "Congress' choice matters," Holtz-Eakin said. "If the estate tax goes back to 55 percent, it will have a strong negative impact on the probability that small businesses will expand their payrolls." Allowing the estate tax to revert in 2011 to 55 percent with the exclusion reduced to $1 million would "eventually reduce gross domestic product by $183 billion," Stephen J. Entin, president, Institute for Research on the Economics of Taxation, added.

Business Planning

  Uncertainty over the future reach of the estate tax impacts business planning, Eugene Sukup, chair, Sukup Manufacturing Co., Sheffield, Iowa, said. Sukup explained that he intends for his children to inherit the family business, but worries that his children could be forced to sell the business to pay federal estate tax after his death.

  "A low estate tax rate provides an incentive to grow the family business," Dick Patten, president of the American Family Business Institute, which sponsored the briefing, said. "A high estate tax provides the opposite."

  By George L. Yaksick, Jr., CCH News Staff

CCH (cch.taxgroup.com) reports:

  Two limited liability companies taxed as partnerships and engaged in unspecified litigation with the IRS were able to designate a new tax matters partner (TMP) common to both entities and change the caption of their cases where the designation satisfied the controlling requirements of the regulations under Code Sec. 6231(a)(7). The entities had formally amended their operating agreements to name the new member as the TMP. In addition, the court rejected the IRS's argument that the designation was invalid because the new TMP would not have any tax liability determined in the relevant case. The TMP serves as a fiduciary; personal interest is not required.

Gateway Hotel Partners, LLC, TC Memo. 2009-128, Dec. 57,844(M)

Other References:

 
Code Sec. 6231

  CCH Reference - 2009FED ¶37,849.05

  CCH Reference - 2009FED ¶37,849.45

  Tax Research Consultant

  CCH Reference - TRC PART: 60,102

CCH (cch.taxgroup.com) reports:

  The IRS has clarified that a transaction under the Economic Stabilization Act of 2008 (EESA) (P.L. 110-343) that involves the acquisition by or on behalf of the Treasury Department of preferred stock, common stock, warrants to purchase common stock or other types of equity of a financial institution or other entity is not an event with respect to which a payment can be made under a Code Sec. 409A nonqualified deferred compensation plan. Pursuant to Code Sec. 409A(a)(2)(A)(v) and Reg. §1.409A-3(a)(5), this type of transaction, referred to as a Treasury EESA Equity Acquisition Transaction, is not a change in ownership or effective control, or a change in the ownership of a substantial portion of the assets of the corporation, collectively referred to as a change in control event. Consequently, the transaction is not a permissible Code Sec. 409A payment event and compensation that would otherwise be deferred is currently taxable to plan participants.

  A nonqualified deferred compensation plan will not fail to satisfy the plan document requirements of Code Sec. 409A(a) and the regulations thereunder simply because the plan does not explicitly provide that a Treasury EESA Equity Acquisition Transaction will not trigger a payment under the plan. For this purpose, it is irrelevant whether the plan incorporates the definition of a change in control event by reference to the final regulations (Reg. §1.409A-3(i)(5)) or sets forth a definition of a change in control event that otherwise meets the requirements of the final regulations.

  This guidance is effective June 4, 2009. The Treasury Department and the IRS intend to amend the regulations under Code Sec. 409A(a) to incorporate the guidance. The amended regulations will be applicable to Treasury EESA Equity Acquisition Transactions entered into on or after June 4, 2009.

Notice 2009-49, 2009FED ¶46,393

Other References:

 
Code Sec. 409A

  CCH Reference - 2009FED ¶18,960.025

  Tax Research Consultant

  CCH Reference - TRC COMPEN: 15,056.15
CCH Reference - TRC PLANRET: 3,206.35

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Iowa Gov. Chet Culver has signed legislation that, among other things: (1) enacts a new sales and use tax exemption for data center businesses; (2) enacts a sales and use tax exemption for nonprofit youth athletic groups; (3) amends the sales tax rebate available to owners or operators of an automobile racetrack facility; (4) limits the casual sale exemption by excluding certain all-terrain vehicles; and (5) amends the definition of "lodging" for purposes of the hotel and motel tax.

CCH (cch.taxgroup.com) reports:

  The IRS has extended return-filing and payment deadlines for victims of the severe storms, flooding, tornadoes, and straight-line winds on May 3, 2009, in the Kentucky counties of Breathitt, Floyd, Owsley and Pike. Persons who qualify for assistance have until July 2, 2009, to file returns, pay taxes and perform other time-sensitive acts otherwise due between May 3, 2009 and July 2, 2009.

  Affected taxpayers include those residing or having businesses in the disaster area, as well as persons living outside the covered disaster areas whose books, records, or tax professionals' offices are located in the covered disaster areas and all relief workers affiliated with recognized government or philanthropic organizations that assisted in the relief efforts. Taxpayers who reside or have businesses located outside of the covered disaster areas must request relief by calling the IRS disaster hotline (1-866-562-5227).

  The filing extension does not apply to information returns in the Form W-2, 1098, 1099 series, to Forms 1042-S or 8027, or to employment or excise tax deposits. However, penalties for failure to timely file information returns can be waived, for reasonable cause, under existing procedures. In addition, the IRS will abate penalties and interest for failure to make timely employment and excise tax deposits due between May 3, 2009, and May 18, 2009, so long as the deposits were made by May 18, 2009.

  The IRS also reminded taxpayers that, effective for 2009: (1) taxpayers do not have to itemize to take advantage of deductions for uninsured disaster losses; (2) the 10-percent adjusted gross income limit for losses no longer applies; and (3) taxpayers must reduce the loss from each casualty event by $500.

  Taxpayers have the option of claiming disaster-related casualty losses on either their 2008 or 2009 federal returns. However, because of recent law changes, while claiming the losses on 2008 returns may result in faster refunds, waiting until 2009 to make the claim may be more beneficial depending on the taxpayer's circumstances. Taxpayers claiming disaster-related casualty losses on their 2008 returns should mark the top of their tax returns "Kentucky/Severe Storms, Flooding and Mudslides" to expedite refunds.

Kentucky Disaster Relief Notice, 2009FED ¶46,391

Other References:

 
Code Sec. 7508A

  CCH Reference - 2009FED ¶42,687C.22

  Tax Research Consultant

  CCH Reference - TRC FILEIND: 15,204.25
CCH Reference - TRC FILEBUS: 15,110
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Overriding the veto of Governor Jim Douglas, the Vermont legislature has passed the Fiscal Year 2010 Appropriations Act that contains a tax amnesty program as well as various property, cigarette, and estate tax provisions. Separate stories discuss the changes to income tax (TAXDAY, 2009/06/03, S.32) and sales and use tax (TAXDAY, 2009/06/03, S.33).

CCH (cch.taxgroup.com) reports:

  New York City Mayor Michael R. Bloomberg and City Council Speaker Christine C. Quinn have announced an agreement on a revenue package containing a variety of sales tax, general corporation tax, and unincorporated business tax proposals. If approved by the state legislature and signed into law by the governor, the package would do following:

  -- increase the New York City portion of the sales tax rate from 4.0% to 4.5%;

  -- repeal the exemption for purchases of clothing items priced at $110 or more;

  -- apply the full New York City sales tax to electric and natural gas customers purchasing energy from non-utility companies;

  -- shift the general corporation tax from a three-factor apportionment formula to a single sales factor; and

  -- eliminate the unincorporated business tax for businesses with incomes under $100,000 and reduce the tax for businesses making up to $150,000.

  The press release concerning the agreement is available at
http://www.nyc.gov/html/om/html/2009a/pr247-09.html.

Press Release , New York City Mayor's Office, June 1, 2009
 

CCH (cch.taxgroup.com) reports:

  A corporation's communications excise tax refund claim for taxes paid on long distance service --service that the IRS conceded in
Notice 2006-50 was nontaxable --was untimely under Code Sec. 6511(a) because it was filed 10 years after the tax was paid. Therefore, the Court of Federal Claims correctly held under Code Sec. 7422 that it lacked jurisdiction over the refund claim.

  The appellate court explained that the jurisdiction of the Court of Federal Claims is defined by the Tucker Act (28 U.S.C. §1491(a)(1)), which allows it to decide certain monetary claims against the United States. But the Court of Federal Claims' Tucker Act jurisdiction is limited by the Tax Code, including Code Sec. 7422(a), which bars a suit when a refund claim has not been filed with the IRS. In turn, Code Sec. 6511(a) requires taxpayers to file refund claims "within 3 years from the time the return was filed or 2 years from the time the tax was paid . . . or if no return was filed by the taxpayer, within 2 years from the time the tax was paid." (Emphasis added.)

  The fact that the corporation was not required to file a return did not render Code Sec. 6511(a) inapplicable since someone must file a return for the federal communications excise tax --namely, the telephone carriers who collect and remit the tax. Thus, because Code Sec. 6511(a) is the type of tax for which returns are filed, its time limitations apply to all taxes and all taxpayers, regardless of who was obligated to file.

  Appeal from U.S. Court of Federal Claims case at
2008-1 USTC ¶70,278.

RadioShack Corporation, CA-FC, 2009-1 USTC ¶70,285

Other References:

 
Code Sec. 4251

  CCH Reference - ETR ¶18,135.04

  CCH Reference - ETR ¶18,135.68

 
Code Sec. 6511

  CCH Reference - ETR ¶50,435.01

  CCH Reference - ETR ¶50,435.08

 
Code Sec. 7422

  CCH Reference - ETR ¶57,475.01

  CCH Reference - ETR ¶50,475.10

  Tax Research Consultant

  CCH Reference - TRC IRS: 32,052.05
CCH Reference -
TRC LITIG: 9,056
CCH Reference - TRC EXCISE: 9,056
 

CCH (cch.taxgroup.com) reports:

CCH (cch.taxgroup.com) reports:

  IRS Commissioner Douglas Shulman in addressing the Organization for Economic Co-Operation and Development (OECD) before a luncheon on June 2 in Washington, DC, focused on the IRS's international tax initiative and the agency's latest efforts on cracking down on international tax abuses, an integral part of its overall plan. Shulman stated that the IRS would be attacking abuse on two fronts: reigning in aggressive tax planning by businesses and calling to task U.S. individuals with foreign assets who fail to pay their associated tax liabilities.

  According to Shulman, the latest IRS statistics indicate a 71-percent increase in foreign tax credits claimed by U.S. businesses between 2000 and 2007 and a 133-percent increase in foreign tax credits claimed by individuals. Shulman said these figures indicate that more of the country's business transactions are occurring across international borders and that all of the world's tax authorities are forced to deal with the resulting issues.

  To provide adequate tax administration in the international area, Shulman emphasized that the IRS would require certain "must haves." The top three on this list include:

  Personnel. Shulman noted that the IRS is often labeled with the moniker of "out manned and out gunned" in the international tax area due to the ability of large multi-national companies to pay more than the average taxpayer (as well as the average IRS agent) for sophisticated legal and tax services. Shulman emphasized the agency's need retain its existing international tax experts, as well as hire new personnel with international tax experience.

  Information Exchange. Shulman also underscored that the IRS needs to have resources to support its focus on enhancing information reporting in order to boost compliance in this area. Analyzing and utilizing data obtained from information reporting would not only aid the agency in its enforcement of international tax laws, but also in its provision of services.

  Qualified Intermediary Program. Shulman reported that the IRS will be putting more effort into improving its qualified intermediary program. He considers the tool in international enforcement essential to stopping abusive transactions.

Proposed Measures

  Shulman also reviewed President Obama's recently announced international tax initiative and proposals stated in the President's Fiscal year 2010 budget. He pointed out that the administration seeks to prevent U.S. multi-nationals from investing overseas, claiming tax deductions for related expenses and then deferring income tax on the resulting income. With the exception of research and experimentation expenses, the administration would prevent companies from claiming tax deductions associated with their foreign investments until they actually repatriated the associated offshore profits back into the U.S.

  The administration also proposes, Shulman explained, to change the "check-the-box" rules that enable U.S. multinational corporations to cause their foreign subsidiaries to be ignored for federal income tax purposes. This effort is aimed at ensuring fairness in the IRS's enforcement of the tax code, as well as allowing U.S. businesses to remain competitive in the global market.

  With respect to individuals, Shulman pointed out that the Obama administration has proposed changes to the Internal Revenue Code that would make it easier for qualified intermediaries of cross-border transactions to ensure that U.S. taxpayers are paying correct amounts of tax, in addition to creating a financial disincentive for U.S. taxpayers who wish to use a non-qualified intermediary.

  Under the administration's proposals, Shulman reported, U.S. financial institutions and qualified intermediaries would be required to determine the true owner of any account to discourage U.S. taxpayers from forming shell entities in which to hold offshore accounts. Additionally, the administration would require U.S. financial institutions and qualified intermediaries to withhold 20 to 30 percent on all U.S. payments to individuals or businesses who use non-qualified intermediaries. In order to obtain a refund for this amount, U.S. investors would be required to disclose their identities and prove that they are in compliance with applicable tax laws. The proposal would also require:

  --Increasing reporting requirements for qualified intermediaries;

  --Doubling certain penalties for failure to disclose a foreign financial account; and

  --Extending the current statute of limitations on international tax enforcement to six years after information is disclosed to the IRS.

  CCH Comment. Shulman, while appointed by President Bush and confirmed in March 2008, appears to be endorsing much of the Obama administration's international tax proposals. The IRS Commissioner is appointed by the president with the advice and consent of the Senate. The IRS Restructuring and Reform Act of 1998 (P.L. 105-206) amended Code Sec. 7803 to set a five-year term of office. The National Commission on the Restructuring of the IRS had stated, "Providing a five-year term is designed to bring greater continuity and independence to the position without diluting the Executive Branch accountability for management of the IRS."

  Shulman concluded his address by stating that "many corporations and their legal tax advisors are generally trying to comply with the myriad of international tax laws. While we're not going to always agree, about what the law is or how it applies in a particular case, we recognize that many businesses are trying to get it right. However, we all know that some businesses use the complexity of the tax code and the complexity of the international capital markets to push the envelope too far. That is where we have issues and that is where we will continue to focus."

  By Torie Cole, CCH News Staff

Prepared Remarks of Douglas H. Shulman Before the OECD
 

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  The Washington Department of Revenue reminds taxpayers that beginning July 26, 2009, sales or use tax applies to all digital products, regardless of how they are accessed. In addition to downloaded digital goods, the tax applies to streamed and accessed digital goods, digital automated services, and remote access software. The taxability of these goods does not depend on whether the purchaser acquires a permanent or nonpermanent right of use. The notice can be viewed on the department's Web site at
http://dor.wa.gov/Content/Home/Default.aspx.

Digital Products, Washington Department of Revenue, June 1, 2009

CCH (cch.taxgroup.com) reports:

  In an action based on taxpayers' and the IRS's motions for reconsideration of the taxpayers' prior consolidated cases arising out of the Kersting project tax shelter litigation ( L.L. Hartman , Dec. 57,431(M), TC Memo. 2008-124 (Hartman I)), the Tax Court denied the IRS's motion to reverse all factual findings that were based on an item in the IRS's privilege log that included three drafts of a proposed post-trial settlement offer and that concerned formulation and communication of that settlement offer. The three drafts were documents in the IRS's records subject to discovery that were properly includible in the record in the taxpayers's consolidated cases in Hartman I.

  In addition, the mitigating effect of the post-trial settlement offer could not be properly evaluated without consideration of the three drafts and all of the documents included in the same privilege log item were relevant to the issues in the motions to vacate in Hartman I. Because the drafts spoke for themselves, the court ordered them received into evidence as the court's exhibits rather than setting the matter for a hearing and commencing discovery procedures, which the IRS opposed.

  Background. In Hartman I, the court granted the taxpayers' motions to vacate the decisions entered in their three consolidated cases arising out of the Kersting project tax shelter litigation, which involved fraud on the court by an IRS attorney and supervisor in the process of resolving the cases. The taxpayers, who entered into a settlement after the fraud was discovered, but on terms less favorable terms than the outcome in a later Ninth Circuit appeal, were entitled to have their settlements vacated and their cases resolved on terms identical to those ordered by the appellate court.

  Generally, in order to resolve deficiencies and additions to tax assessed against hundreds of tax shelter participants, the taxpayers and other participants agreed to be bound by the outcome of selected test cases. In order to encourage the participants in one particular test case not to withdraw, IRS attorneys entered into a secret settlement (known as the "T settlement" or the "Thompson settlement") that ensured a refund sufficient to cover their attorney's fees. The Ninth Circuit eventually ruled that the IRS attorneys had committed fraud on the court by failing to disclose the "T settlement" offer to their superiors, the attorneys for other participants, and the court. As a consequence, it held that terms equivalent to the secret settlement agreement had to be extended to all test case petitioners and all others properly before the court ( J.A. Dixon, CA-9, 2003-1 USTC ¶50,194 (Dixon V)).

  This did not, however, alter the outcome for those, like the taxpayers in Hartman I, who entered into stipulated settlements after the fraud was discovered but prior to the Dixon V decision. The court in Hartman I also held that the sanction mandated by the Ninth Circuit in Dixon V should be imposed in the cases of all Kersting project petitioners in which stipulated decisions were entered on or after the commencement date of implementing the test case procedure. The court further held that, once the Hartman I decision became final, an implementation order would be issued requiring that all remaining Kersting project taxpayers against whom stipulated decisions had been entered have their accounts adjusted administratively in accordance with the Thompson settlement.

  The IRS's motion to reconsider Hartman I to strike from it findings of continuing fraud on the court beyond the original misconduct of the IRS's attorneys in the test case proceedings was determined to be moot because the court did not find such a continuing fraud beyond that committed by the IRS's trial counsel during the test case proceedings and there were no findings to strike.

  In response to the IRS's requests to delay entry of decisions in the taxpayers' cases and the implementation of any sanction in the closed cases until after the Ninth Circuit has issued its mandate in the current appeal of certain test and nontest cases, the court concluded that the decisions in those cases should not be postponed. The court, however, ruled that the implementation of the sanction in closed cases other than the cases at hand should not commence until the later of: (1) the last date a decision in any of these cases become final, (2) the date the Ninth Circuit renders its mandate in any of these cases, if and when the decisions are appealed, and (3) the date of the mandate in the test case appeal. The court also issued an order to facilitate the implementation of the sanction and ruled that, in each case in which the taxpayers have requested that the sanction be applied in their affected closed cases, the IRS will file a motion to vacate the decision.

  The court denied the taxpayers' motion to extend the sanction to participants in the Kersting tax shelters who never filed a petition in the Tax Court to contest the deficiencies determined against them or who filed a petition but settled their cases before the test case proceedings began. The fraud committed on the court did not extend the time for filing a petition after a notice of deficiency had been issued and the court never acquired jurisdiction over those taxpayers or their deficiencies. Also, a taxpayer who did not file a petition in the Tax Court did not have a case in this court to which the fraud committed by the IRS's attorneys in the test case proceeding could have attached.

  Further, the court invoked its inherent power to impose the sanction against the IRS for the harm done to the test case proceedings, which did not involve taxpayers who were not part of those proceedings. Finally, the court's inherent power is limited to imposing the sanction in those cases in which a fraud was committed and does not extend to cases where no fraud was committed (such as cases that settled before the test case proceedings began) or where no case was filed.

L.L. Hartman, TC Memo. 2009-124, Dec. 57,840(M)

Other References:

 
Tax Court Rule 161

  CCH Reference - 2009FED ¶42,321.74

  CCH Reference - 2009FED ¶42,321.76

  Tax Research Consultant

  CCH Reference - TRC LITIG: 6,592

CCH (cch.taxgroup.com) reports:

  The IRS has updated interim guidance on the process that manufacturers must use to certify property for the nonbusiness energy credit under
Code Sec. 25C, and the conditions under which homeowners may rely on the certification to claim the credit. The guidance applies to qualified property placed in service after December 31, 2008.

  The nonbusiness energy property credit was available for eligible qualified energy efficiency improvements and qualified energy property placed in service in 2006 and 2007. However, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) extended the credit for qualified improvements and property placed in service in 2009 and 2010. The maximum credit allowed depends on the year the property is placed in service. In addition, there are specific limitations on the amount of credit allowed for certain items of property.

  A qualified energy efficiency improvement is any building envelope component of nonbusiness property that satisfies certain energy efficiency standards. This includes insulation materials, exterior windows and skylights, exterior doors, and any metal roof with appropriate pigmented coatings, or any asphalt roof with appropriate pigmented coatings or cooling granules in 2009 only. Residential energy property expenditures are expenditures made for qualified energy property that meets prescribed performance and quality, such as furnaces, boilers, heat pump water systems, central air conditioners, water heaters, and beginning in 2009, stoves using biomass fuel.

  To qualify for the credit, property must generally meet or exceed standards established by the 2000 International Energy Conservation Code (IECC) and supplements. However, additional standards apply to qualified property placed in service after 2008. For example, for buildings envelope components such as insulation materials or systems, the property must be specifically and primarily designed to reduce heat loss or gain of a home. In addition, it must meet the prescriptive criteria for such material or system established by the 2009 IECC. Other envelope components, such as exterior windows or doors, and storm windows or doors, must meet certain U factors and prescriptive criteria established by the IECC.

  Similarly, for expenditures for qualified energy property the property must meet specific energy efficiency requirements. However, for purposes of claiming the credit with respect to such property (other than a furnace with an advanced main air circulating fact), the credit is allowed only for amounts paid to purchase the property and labor costs for on-site installation.

  Manufacturers may certify eligible property as either an eligible building envelope component or qualified energy property by providing the purchaser with a certification statement that satisfies the enumerated requirements for the applicable classification. A manufacturer that certifies an item as an eligible building component or qualified energy property must retain documentation that the item satisfies the applicable requirements.

  A purchaser may rely on the manufacturer's certification that a product is qualified energy property. However, a taxpayer may rely on a manufacturer's certification that a component is an eligible building envelope component only if the component is installed in a manner consistent with the item's certification. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed.

 
Notice 2006-26, I.R.B. 2006-11, 622, is superseded.

Notice 2009-53, 2009FED ¶46,390

Other References:

 
Code Sec. 25C

  CCH Reference - 2009FED ¶3843.10

  Tax Research Consultant

  CCH Reference - TRC INDIV: 57,800

Tax Analysts report:

CCH (cch.taxgroup.com) reports:

  Overriding a veto by Gov. Jim Gibbons, the Nevada Legislature has enacted legislation that temporarily revises the rate of the modified business tax, the rate of the local school support tax, and the state business license fee. Additionally, the governmental services tax due for used vehicles has been increased.

CCH (cch.taxgroup.com) reports:

  Certain Massachusetts corporate excise taxpayers that experience an increase in a combined group's net deferred tax liability as a result of the enactment of combined reporting requirements for unitary businesses are entitled to a FAS 109 deduction in order to alleviate the potential financial statement impact resulting from the move from separate to combined reporting. On or before July 1, 2009, the principal reporting corporation must file electronically with the Massachusetts Department of Revenue to state the amount of the FAS 109 deduction to be claimed in future years.

  For these purposes "net deferred tax liability "means the net increase, if any, in deferred tax liabilities minus the net increase, if any, in deferred tax assets of the combined group, as computed in accordance with generally accepted accounting principles (GAAP), that would otherwise result from the imposition of the combined reporting requirements provided for in the Act. The "Act" refers to An Act Relative to Tax Fairness and Business Competitiveness, signed into law on July 3, 2008. St. 2008, c. 173.

CCH (cch.taxgroup.com) reports:

  Maine Gov. John Baldacci has signed a budget bill that contains a number of personal income and corporation income tax provisions, including amendments that update the state's Internal Revenue Code (IRC) conformity date, decouple from certain recently enacted federal provisions, establish a "throwout" rule, temporarily eliminate federal net operating loss (NOL) carryforwards, potentially freeze the personal income tax brackets, and reduce the earned income credit.

CCH (cch.taxgroup.com) reports:

  As summer starts, the IRS issued guidance implementing provisions of recent tax legislation. The guidance addresses the work opportunity tax credit (WOTC) and employer-owned life insurance (EOLI). Tax revenue from individual incomes taxes fell 44 percent in April 2009 compared to April 2008, reflecting the economic downturn. In other news, the U.S. and Luxembourg signed a protocol to their tax treaty to better facilitate the exchange of information and Helen Elizabeth Garrett, President Obama's nominee for Assistant Secretary of Treasury for Tax Policy, announced she did not want the post.

IRS

  Work Opportunity Tax Credit. New guidance from the IRS describes enhances to the work opportunity tax credit made by the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) (P.L. 111-5) (IR-2009-55, Notice 2009-28; TAXDAY, 2009/05/29, I.3). Under the 2009 Recovery Act, more veterans and young people may qualify as targeted groups for the credit.

  Employer-Owned Life Insurance. The IRS released guidance in question and answer format about the treatment of employer-owned life insurance (EOLI) contracts under the Pension Protection Act of 2006 (PPA) (P.L. 109-280) (Notice 2009-48; TAXDAY, 2009/05/27, I.4). The PPA generally limits the amount of death benefits that can be excluded from the gross income of a policyholder to the sum of the premiums and other amounts paid by the policyholder for the contract with some exceptions if, among other things, notice and consent procedures are followed.

  The EOLI notice and consent requirements under the PPA must be satisfied before the policy is issued, Rebecca Baxter, attorney, Insurance Branch, IRS Office of Chief Counsel, said on May 28 in Washington, D.C. (TAXDAY, 2009/05/29, I.4). "A policy is issued on the later of the date of application for coverage, the effective date of coverage or the formal issuance of the contract," Baxter explained.

  Insurance Contracts. A proposed safe harbor would address the application of life insurance rules to policies that mature after the insured individual attains the age of 100 (Notice 2007-47; TAXDAY, 2009/05/27, I.3). Speaking in Washington, D.C. on May 28, Donald J. Drees, Jr., senior technician reviewer, Insurance Branch, IRS Office of Chief Counsel, requested comments on the proposed safe harbor.

  Corporations. The IRS issued final regulations to determine which corporations are included in a controlled group of corporations (T.D. 9451;
TAXDAY, 2009/05/27, I.2). The guidance generally follows temporary and proposed regulations issued in 2006 (T.D. 9304, I.R.B. 2007-6, 423, NPRM REG-161919-05, I.R.B. 2007-6, 463) and amended in 2007 (T.D. 9369, I.R.B. 2008-6, 394, NPRM REG-104713-07, I.R.B. 2008-6, 409).

  Tax Collection. Revenue from individual income taxes declined significantly in April 2009 compared to April 2008, according to Treasury Department statistics (TAXDAY, 2009/05/28, T.2). The Treasury Department collected $136.7 billion in individual income taxes in April 2009 compared to $244 billion in individual income taxes in April 2008.

  New Markets Tax Credit. Treasury Secretary Timothy F. Geithner announced on May 27 that 32 organizations will share $1.5 billion in New Markets Tax Credit allocations (TAXDAY, 2009/05/28, T.1). Taxpayers receive a credit against federal income taxes for making qualified equity investments in investment vehicles known as community development entities (CDEs).

  Tax Treaties. The U.S. and Luxembourg signed a protocol to their 1996 tax treaty (TDNR TG-143; TAXDAY, 2009/05/27, T.1). The protocol will permit U.S. tax officials to obtain information from Luxembourg on all types of federal taxes, in both civil and criminal matters, for tax years beginning in or after 2009.

  Tax Policy Nominee. Helen Elizabeth Garrett, nominated by President Obama to serve as Assistant Secretary of Treasury for Tax Policy, withdrew herself from consideration on May 29 (TAXDAY, 2009/06/01, W.1). Garrett said she needed to reassess her decision to accept the nomination due to family reasons.

  By George L. Yaksick, Jr., CCH News Staff
 

CCH (cch.taxgroup.com) reports:

  The IRS has extended return-filing and payment deadlines for victims of the severe storms, flooding, tornadoes and straight-line winds in Volusia County in Florida that was declared a federal disaster area on May 17, 2009. Persons who qualify for assistance have until July 16, 2009, to file returns, pay taxes and perform other time-sensitive acts otherwise due between May 17, 2009 and July 16, 2009. Affected taxpayers include those residing or having businesses in the disaster area, as well as persons living outside the covered disaster areas whose books, records, or tax professionals' offices are located in the covered disaster areas and all relief workers affiliated with recognized government or philanthropic organizations that assisted in the relief efforts. Taxpayers who reside or have businesses located outside of the covered disaster areas must request relief by calling the IRS disaster hotline (1-866-562-5227).

  The filing extension does not apply to information returns in the Form W-2, 1098, 1099 series, to Forms 1042-S or 8027, or to employment or excise tax deposits. However, penalties for failure to timely file information returns can be waived, for reasonable cause, under existing procedures. In addition, the IRS will abate penalties and interest for failure to make timely employment and excise tax deposits due between May 17, 2009, and June 1, 2009, so long as the deposits were made by June 1, 2009.

  The IRS also reminded taxpayers that, effective for 2009: (1) taxpayers do not have to itemize to take advantage of deductions for uninsured disaster losses; (2) the 10-percent adjusted gross income limit for losses no longer applies; and (3) taxpayers must reduce the loss from each casualty event by $500. Taxpayers have the option of claiming disaster-related casualty losses on either their 2008 or 2009 federal returns. However, because of recent law changes, while claiming the losses on 2008 returns may result in faster refunds, waiting until 2009 to make the claim may be more beneficial depending on the taxpayer's circumstances. Taxpayers claiming disaster-related casualty losses on their 2008 returns should mark the top of their tax returns "Florida/Severe Storms, Flooding, Tornadoes, and Straight-line Winds" to expedite refunds.

Florida Storm, Flood, Tornado and Straight-Line Wind Victims Disaster Relief Notice, FL 2009-38, 2009FED ¶46,389

Other References:

 
Code Sec. 7508A

  CCH Reference - 2009FED ¶42,687C.22

  Tax Research Consultant

  CCH Reference - FILEIND: 15,204.25
CCH Reference - FILEBUS: 15,110
 

CCH (cch.taxgroup.com) reports:

  The IRS has announced that it does not acquiesce in a decision by the Tenth Circuit Court of appeals in L.A. Cox , CA-10,
2008-1 USTC ¶50,165, relating to the ability of an IRS Appeals officer to conduct a Collection Due Process (CDP) with individuals with whom the officer had a prior involvement. The Tenth Circuit disqualified the officer from conducting the CDP hearing regarding a married couple's tax liabilities for two tax years because the officer had considered those liabilities during a CDP hearing for a prior year, ruling that the officer's consideration of those liabilities was "prior involvement" prohibited under Code Sec. 6330(b)(3). The Tenth Circuit also stated, in a footnote, that the holding, by implication, would invalidate Reg. §301.6330-1(d)(2), which expressly excludes prior CDP hearing from the definition of "prior involvement."

  The IRS determined that the Tenth Circuit erred by failing to give proper deference to the Service's construction of the term "involvement" in the regulations. The conclusion that "involvement" has a plain meaning is incorrect because the term is not defined in the statute or legislative history and is inherently ambiguous.

  According to the IRS, an Appeals officer is not legally precluded by the "no prior involvement" language from conducting a taxpayer's CDP hearing for a given tax year because he considered the taxpayer's compliance history when evaluating eligibility for collection alternatives during a prior CDP hearing. There is no disqualifying involvement when the same officer holds consecutive CDP hearings for the same taxpayer who has accrued new unpaid tax liabilities. Instead, "prior involvement" refers to an Appeals officer having considered the tax year at issue in a prior non -CDP context, such as when the Appeals officer worked on collection of the tax as a revenue officer.

  An Action on Decision dated May 11, 2009 (TAXDAY, 2009/03/11, I.8), recommended nonacquiescence.

Nonacquiescence Announcement, 2009FED ¶46,385

Other References:

 
Code Sec. 6330

  CCH Reference - 2009FED ¶38,184.16

  CCH Reference - 2009FED ¶38,184.28

 
Code Sec. 7521

  CCH Reference - 2009FED ¶42,791.30

  Tax Research Consultant

  CCH Reference - TRC IRS: 51,056.15
 

Tax Analysts report: