Tax News

CCH (cch.taxgroup.com) reports:

  The $29 billion state budget signed by New Jersey Gov. Jon S. Corzinebudge on June 29, 2009, imposes additional corporation (business) taxes (CBTs) and personal income taxes; increases taxes on cigarettes and alcohol, except beer; and eliminates property tax rebates for certain individuals. The budget includes funding that is dependant upon the passage of separate legislative measures, as indicated, below. A.B. 4102, A.B. 4103, and A.B. 4104 also were signed by the governor on June 29, 2009.

 

CCH (cch.taxgroup.com) reports:

  A committee reviewing the Uniform Division of Income for Tax Purposes Act (UDITPA) for possible revision voted 5-2 to recommend that its study of UDITPA terminate in the face of intense opposition from some taxpayers and state legislators. The vote by the study committee appointed by the Uniform Law Commission (ULC) came during a June 30 conference call. The committee included a proviso that its recommendation may be revisited if circumstances change. The recommendation will be considered by the ULC leadership during its annual meeting in Santa Fe, New Mexico, July 9-16.

 

CCH (cch.taxgroup.com) reports:

  An individual acting as a branch manager and a member of a broker-dealer company's branch office servicing day traders could deduct as ordinary and necessary business expenses commission rate adjustments paid to his brother's limited liability company (LLC). The taxpayer negotiated the commission rate adjustments with all the customers, including his brother's LLC, which was the branch office's biggest customer, at arm's-length to keep the customers when they complained of the untimeliness of the broker-dealer company's commission rebates. It was a common practice in the day trading industry to lower commissions to attract and retain customers, and the broker-dealer company offered commission rebates to customers upon requests by branch managers. Whether the taxpayer or the broker-dealer company paid the commission rebates did not change the economics. Because the commission rate adjustments were expenses that would be expected of someone trying to increase and maintain business in the highly competitive world of day trading and were appropriate and helpful to keep customers trading through the branch office, they qualified as ordinary and necessary business expenses.

  The court rejected the IRS's alternative argument that the commission rate adjustments were illegal payments under Code Sec. 162(c)(2) made in violation of federal law implemented by NASD Rule 2110. The payments were not commission-sharing payments made in return for referrals of business, and the IRS failed to show that they would be classified as such by the NASD or that the payments would result in the taxpayer's being subject to a civil or criminal penalty or losing his license. Such payments were also not illegal per se since the IRS could not cite any statute or regulation specifically prohibiting them.

  The IRS's argument that the taxpayer's payments to his brother's LLC lacked economic substance since they were returned to the taxpayer in later years was also rejected since the later payments represented repayment of a principal and interest on a loan extended by the taxpayer to the LLC and a share of the LLC's profits made in the years when the taxpayer became responsible for operating and maintaining a new trading software at the LLC. The IRS also could not establish that the commission rate adjustment arrangement was not an arm's-length arrangement. These payments were necessary and legitimate business expenses, indistinguishable from those made to unrelated parties, and resulted in net commissions to the LLC comparable to those the LLC could have negotiated directly with the broker-dealer company or any other broker-dealer.

  Further, the taxpayer did not have to include in gross income trading gains generated from a subaccount with his brother's LLC since he had no ownership interest in, or rights to, the subaccount and never received any funds from the subaccount. The taxpayer did not have an agreement with the LLC giving him rights to a share of the subaccount gains while traders who were entitled to subaccount gains had written agreements with the LLC setting the terms of the profit splits and also received Schedules K-1 reflecting their portions of the subaccount gains. The subaccount belonged to the LLC and all the gains generated in the subaccount were ultimately passed to the taxpayer's brother.

  Since all of the taxpayer's records were accurate and thorough, except for two commission rate adjustments that were mistakenly deducted in the tax year at issue even though they were not, in fact, paid until the following year, the taxpayer was not liable for the accuracy-related penalty for negligence under Code Sec. 6662(a).

J.T. Manning, TC Memo. 2009-157, Dec. 57,876(M)

Other References:

 
Code Sec. 61

  CCH Reference - 2009FED ¶5504.198

  CCH Reference - 2009FED ¶5504.20

 
Code Sec. 162

  CCH Reference - 2009FED ¶8520.517

  CCH Reference - 2009FED ¶8858.01

 
Code Sec. 6662

  CCH Reference - 2009FED ¶39,651G.31

  Tax Research Consultant

  CCH Reference - TR INDIV: 6,050

CCH Reference - TRC BUSEXP: 3,100
CCH Reference - TRC PENALTY: 3,106
 

CCH (cch.taxgroup.com) reports:

  A husband and wife who owned, directly or through other entities, interests in seven limited liability partnerships (LLPs), two limited liability companies (LLCs), and two tenancies in common (TICs) were not limited partners in limited partnerships with respect to such interests; accordingly, the couple was not subject to Code Sec. 469(h)(2) and companion temporary regulations, which presumptively treat losses from certain limited partnerships as passive.

  CCH Comment.
Code Sec. 469(h)(2), enacted in 1986, and Temporary Reg. §1.469-5T(e)(1) and (2), adopted in 1988, predate the existence of LLPs, and the widespread availability of LLCs. Thus, they only contemplate limited or general partnership interests in a limited partnership entity, the nature of which is dependent on an identity between the management rights and liability exposure of the entity's owners. Limited partners of a limited partnership do not participate in the management of the business and do not have personal liability for the debts of the partnership. Entities such as LLPs and LLCs, however, offer owners the ability to materially participate in the management of the business, while at the same time enjoying limited liability for its obligations.

  Although the couple may have had limited liability with respect to all of the LLC and LLP investments, this did not preclude them under state law, as limited partners in a limited partnership would have been, from materially participating in the entities' businesses. Accordingly, in applying the material participation tests under the passive loss rules, the taxpayers were considered to be general partners, not limited partners. Similarly, the TIC properties were not limited partnerships, and the couple's interests in the TIC properties were not limited partnership interests.

  While the couple was identified on certain Schedules K-1, Partner's Share of Income, Deductions, Credits, etc, for the LLPs and one of the TIC properties as being a "limited partner" with respect to such investments, and the couple might have thereby potentially avoided self-employment tax because limited partner distributive shares are not considered self-employment income, this did not require that the couple be regarded as limited partners for purposes of the passive loss rules. The Schedule K-1 form did not provide the option of identifying their interests in the LLPs as that of a "limited liability partner," and the description on the K-1s did not conclusively establish the nature of their interests.

P.D. Garnett, 132 TC No. 19, Dec. 57,875

Other References:

 
Code Sec. 469

  CCH Reference - 2009FED ¶21,966.028

  CCH Reference - 2009FED ¶21,966.53

  Tax Research Consultant

  CCH Reference - TRC BUSEXP: 33,160
CCH Reference - TRC BUSEXP: 33,160.10
 

CCH (cch.taxgroup.com) reports:

  An IRS revenue procedure provides guidance on the election by corporations not to claim the 50-percent additional depreciation allowance (bonus depreciation) (Code Sec. 168(k)) on property acquired after March 31, 2008 (eligible qualified property), and instead to claim accelerated research and/or alternative minimum tax (AMT) credit carryforwards from tax years that began before January 1, 2006. The guidance specifically deals with the special elections for "extension property" contained in Code Sec. 168(k)(4)(H). The guidance covers property eligible for the elections, the time and manner for making elections, and the computation of the bonus depreciation amount (i.e., the amount by which the Code Sec. 38(c) business credit and Code Sec. 53(c) AMT credit limitations are increased if the elections are or are not made.

  CCH Comment. Extension property is property that is eligible for bonus depreciation solely by reason of the extension of the bonus depreciation provision by the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Thus, extension property generally consists of property placed in service in 2009 that is eligible for bonus depreciation.

  The special rules for extension property allow a corporation that made the Code Sec. 168(k)(4) election in its first tax year that ended after March 31, 2008, with respect to bonus depreciation property placed in service after that date to elect not to have the election apply to extension property. If the corporation does not elect to exclude extension property, then a "bonus depreciation amount" is computed separately for bonus depreciation property which is extension property and for bonus depreciation property which is not extension property.

  CCH Comment. The amount of additional research credit and/or AMT credit that a corporation may claim if it elects to forgo bonus depreciation is determined by increasing the Code Sec. 38(c) business credit and Code Sec. 53(c) AMT credit limitations by the bonus depreciation amount for the tax year.

  The second special rule for extension property allows a corporation that did not make a Code Sec. 168(k)(4) election for its first tax year ending after March 31, 2008, to make the election for its first tax year ending after December 31, 2008. If this election is made a bonus depreciation amount is only computed with respect to extension property.

  Definitions relating to extension property . Under the guidance, eligible qualified property is not extension property if:

  --The eligible qualified property is acquired by the taxpayer after March 31, 2008, and placed in service by the taxpayer before January 1, 2009;

  --The eligible qualified property meets the requirements of Code Sec. 168(k)(2)(, is acquired by the taxpayer after March 31, 2008, and is placed in service by the taxpayer before January 1, 2010; or

  --The eligible qualified property meets the requirements of Code Sec. 168(k)(2)(C), is acquired by the taxpayer after March 31, 2008, and is placed in service by the taxpayer before January 1, 2010.

  Extension property is eligible qualified property that:

  --Is acquired by the taxpayer after March 31, 2008, is placed in service by the taxpayer after December 31, 2008, and before January 1, 2010, and is not described in items (2) and (3) above;

  --Meets the requirements of Code Sec. 168(k)(2)(, is acquired by the taxpayer after March 31, 2008, and is placed in service by the taxpayer after December 31, 2009, and before January 1, 2011; or

  --Meets the requirements of Code Sec. 168(k)(2)(C), is acquired by the taxpayer after March 31, 2008, and is placed in service by the taxpayer after December 31, 2009, and before January 1, 2011.

  Election not to apply the Code Sec. 168(k)(4) election to extension property. The election not to apply the Code Sec. 168(k)(4) election to extension property must be made by the due date (including extensions) of the income tax return for the corporation's first tax year ending after December 31, 2008. If a corporation has already filed that return and did not make the election not to apply the Code Sec. 168(k)(4) election to extension property it may make a late election by following the procedures contained in Sec. 4.04 of Rev. Proc. 2009-33. The corporation must attach a statement indicating that is is making the election not to apply its Code Sec. 168(k)(4) election to extension property. Separate written notification of the election must be made to any partnership in which the corporation is a partner on or before the due date (including extensions) of the corporation's return for its first tax year ending after December 31, 2008, or by the date it files its return containing a late election.

  If all members of a controlled group are members of an affiliated group that files a consolidated return, the common parent of the consolidated group makes the election for the group on the consolidated return. Special rules apply when separate federal income tax returns are filed by some or all members of a controlled group.

  If a corporation that made the Code Sec. 168(k)(4) election for its first tax year ending after March 31, 2008, elects not to have that election apply to extension property, the election will exclude extension property placed in service in its first tax year ending after December 31, 2008 and in any subsequent tax year. Even if the corporation does not place any extension property in service in its first tax year ending after December 31, 2008, it must make the election not to apply the Code Sec. 168(k)(4) election to extension property for that tax year if it wishes to apply such election to extension property placed in service in a subsequent tax year.

  Bonus depreciation amount for extension property. If a corporation does not elect to not to apply its Code Sec. 168(k)(4) election to extension property, a separate bonus depreciation amount is computed for eligible qualified property that is not extension property (non-extension property) and eligible qualified proeprty that is extension property (extension property). In general, the computation rules described in
Rev. Proc. 2008-65, I.R.B. 2008-44, 1082, are used to determine these amounts by applying the rules separately to non-extension and extension property. The maximum bonus depreciation amounts is limited to $30 million for non-extension property and $30 million for extension property. Similar rules apply to controlled groups except that the computation rules described in Rev. Proc. 2009-16, I.R.B. 2009-6, 449, for controlled groups are used.

  Election to apply Code Sec. 168(k)(4) election only to extension property. A corporation that did not make the Code Sec. 168(k)(4) election for its first tax year ending after March 31, 2008, may make the election to apply the election only to extension property (the "extension property election").

  The extension property election must be made by the due date (including extensions) of the income tax return for the corporation's first tax year ending after December 31, 2008. A late election may be made by a corporation that filed its return for its first tax year ending after December 31, 2008, pursuant to section 6.06 of this Rev. Proc. 2009-33.

  A C corporation makes the election by:

  --Claiming the refundable AMT and/or research credit on the appropriate line of Form 1120, U.S. Corporation Income Tax Return, for the its first tax year ending after December 31, 2008;

  --Filing, with the Form 1120, the Form 3800, General Business Credit, or Form 8827, Credit for Prior Year Minimum Tax --Corporations, or both, as applicable, for its first tax year ending after December 31, 2008;

  --Filing, with the Form 1120, Form 4562, Depreciation and Amortization (Including Information on Listed Property), for its first tax year ending after December 31, 2008, indicating that it used the straight-line method and did not claim the bonus depreciation deduction for any extension property; and

  --Providing written notification to any partnership in which it is a partner that it is making the Code Sec. 168(k)(4) extension property election on or before the due date (including extensions) of its federal income tax return for its first tax year ending after December 31, 2008, or by the date it files its income tax return containing a late election.

  An S corporation makes the election by:

  Making appropriate adjustments to the appropriate line of the Form 1120S, U.S. Income Tax Return for an S Corporation, for its first tax year ending after December 31, 2008, to reflect the results from making the extension property election;

  Attaching a statement to the return indicating that it is making the extension property election and a statement showing the computation of the increases to the business credit and AMT credit limitations that result from making the election;

  Filing, with the Form 1120S, Form 4562 indicating that the taxpayer used the straight-line method and did not claim the bonus depreciation deduction for all extension property; and

  Providing written notification to any partnership in which it is a partner that it is making the extension property election on or before the due date (including extensions) of its federal income tax return for its first tax year ending after December 31, 2008, or by the date it filed its income tax return containing a late election.

  If the extension property election is made, it applies to all extension property placed in service by the corporation in the its first tax year ending after December 31, 2008, and in any subsequent tax year. Even if the corporation does not place any extension property in service in its first tax year ending after December 31, 2008, it must make the extension property election for that tax year if it wishes to apply the election to extension property placed in service in a subsequent tax year.

  If all members of a controlled group are members of a consolidated group, the common parent makes the extension property election. If a controlled group includes members of a consolidated group, the consolidated group is treated as a single member of the controlled group and the election is made by the common parent. Special election procedures apply to a member of a controlled group that makes the extension property election. The guidance also explains the manner of determining the members of a controlled group for the first tax year ending after December 31, 2008 and subsequent tax years.

  The bonus depreciation amount is generally computed in the manner provided in Rev. Proc. 2008-65 by only taking into account extension property. S corporations will generally follow the rules previously issued for S corporations in Rev. Proc. 2009-16. If a corporation making the extension property eletion is a partner in a partnership, the partnership must provde the corporation with sufficient information to determine its appropriate distributive share of partnership items relating to any extension property placed in service during the tax year.

 
Code Sec. 168(k)(4) election by corporation with short succeeding tax year. The new guidance also modifies section 3.02(1)(a)(ii) of Rev. Proc. 2009-16 to address how a corporation whose first tax year ending after March 31, 2008, ends before December 31, 2008, makes the Code Sec. 168(k)(4) election when the corporation's succeeding tax year is a short tax year. That section generally provides that if a taxpayer's first tax year ending after March 31, 2008, ends before December 31, 2008, the corporation must file an amended federal income tax return on or before the due date (without regard to extensions) of the corporation's original federal income tax return for the succeeding tax year in order to claim the refundable credit resulting from a Code Sec. 168(k)(4) election. The modified guidance provides that if the succeeding tax year is a short tax year, the amended return must be filed on or before the earlier of (1) 30 days after the due date (excluding extensions) of the corporation's income tax return for its first tax year ending after March 31, 2008 or (2) 180 days after the due date (excluding extensions) of the corporation's income tax return for the succeeding tax year.

Rev. Proc. 2009-33, 2009FED ¶46,419

Other References:

 
Code Sec. 168

  CCH Reference - 2009FED ¶11,279.058

  CCH Reference - 2009FED ¶11,279.19

  Tax Research Consultant

  CCH Reference - TRC DEPR: 3,600

  CCH Reference - TRC DEPR: 3,606

CCH (cch.taxgroup.com) reports:

  The IRS has issued guidance providing reliance criteria for private foundations and sponsoring organizations that maintain donor-advised funds in determining whether a potential grantee is an organization described in Code Sec. 509(a)(1),
(2) or (3) for purposes of the excise taxes imposed on grants to certain supporting organizations under
Code Secs. 4942, 4945 and 4966.

  The Pension Protection Act of 2006 (P.L. 109-280) enacted new rules regarding grants by private foundations to certain types of supporting organizations. Under previously issued guidance in Notice 2006-109, 2006-2 CB 1121, for purposes of Code Secs. 4942, 4945 and 4966, a grantor acting in good faith may rely on information from the IRS Business Master File (BMF) or the grantee's current IRS letter recognizing the grantee as exempt from federal income tax and indicating the grantee's public charity classification in determining whether the grantee is a public charity under Code Sec. 509(a)(1),
(2) or (3). The IRS subsequently posted a document on its website clarifying how a grantor may access BMF data and providing that a private foundation or sponsoring organization may use a third party to obtain BMF data as long as certain requirements are met.

  The new guidance provides that, in determining whether a public charity is classified under Code Sec. 509(a)(1),
(2) or (3), a private foundation or a sponsoring organization that maintains a donor advised fund, acting in good faith, may rely on either: (1) the grantee's current IRS letter recognizing the grantee as exempt from federal income tax and indicating the grantee's public charity classification; or (2) information from the BMF.

  A grantor may download the BMF directly from the IRS website and store the relevant information in hard copy or electronically. A grantor may also obtain the BMF information from a third party, so long as the following requirements are met:

  (1) The third party must provide a report to the grantor that includes the grantee's name, Employer Identification Number and public charity classification, a statement that the information is from the most current update of the BMF and the BMF revision date and the date and time the information was provided to the grantor; and

  (2) The report must be in a form that the grantor can store in hard copy or electronically.

  The portions of section 3.01 of Notice 2006-109, 2006-2 CB 1121, that relate to reliance for purposes of determining whether a grantee is a public charity under Code Sec. 509(a)(1),
(2) or (3), are superseded.

Rev. Proc. 2009-32, 2009FED ¶46,418

Other References:

 
Code Sec. 509

  CCH Reference - 2009FED ¶22,812.50

 
Code Sec. 4942

  CCH Reference - 2009FED ¶34,047.034

  CCH Reference - 2009FED ¶34,047.67

 
Code Sec. 4945

  CCH Reference - 2009FED ¶34,107.43

 
Code Sec. 4966

  CCH Reference - 2009FED ¶34,317C.01

  CCH Reference - 2009FED ¶34,317C.20

  Tax Research Consultant

  CCH Reference - TRC EXEMPT: 21,210

  CCH Reference - TRC EXEMPT: 24,400

  CCH Reference - TRC EXEMPT: 33,150

Tax Analysts report: