Tax News

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: