Tax News

CCH (cch.taxgroup.com) reports:

  The city of Oakland was required to exhaust its administrative remedies before filing suit in federal court for collection of California local transient occupancy taxes. Oakland filed a complaint against a number of online travel companies (OTCs) alleging that they collected taxes from their customers based on the retail price of the rooms but remitted to the city taxes based only on the wholesale price. The city, however, had not yet assessed the tax. The ordinance that Oakland enacted to levy the transient occupancy tax provides an administrative process for assessment and requires the tax administrator to determine and assess the tax against hotel operators. The Court of Appeals held that under California law, exhaustion of administrative remedies is a jurisdictional requirement and absent a clear indication of legislative intent, a court should refrain from inferring a statutory exemption from the state's rule requiring exhaustion. The local ordinance uses mandatory language to impose the city's initial obligation to have the tax administrator assess the tax and give notice of the amount to be assessed. The city argued that exhaustion was excused because the administrative remedy is inadequate and the process would be futile. The Court was not persuaded and found that the city was central to the administrative process. Once a final assessment was made and the tax remained unpaid, the city could then file suit to collect the tax. Although the city also argued that it would not be able to recover on its other claims via the administrative process (i.e., conversion, unfair business practices, unjust enrichment, and imposition of a constructive trust), the city could not file suit in federal court without first exhausting its administrative remedies. The Court ruled, however, that the city's failure to exhaust its administrative remedies is a curable defect and, as such, it affirmed the district court's dismissal for lack of subject matter jurisdiction but remanded the case to the district court so that the dismissal is without prejudice.

Oakland v. Hotels.com, LP , U.S. Court of Appeals for the Ninth Circuit, No. 07-17258, July 16, 2009, ¶404-932

  Other References:

 

CCH (cch.taxgroup.com) reports:

  The California Franchise Tax Board (FT has extended the deadline for corporation franchise and income taxpayers that are members of a unitary combined reporting group to file Form 3726, DISA and Capital Gain Information, to disclose their deferred intercompany stock account (DISA) balances. In FTB Notice 2009-01 , the FTB indicated that previously unreported DISA balances had to be disclosed on a completed Form 3726 by May 31, 2009. However, subsequent to the issuance of FTB Notice 2009-01 , many taxpayers contacted the FTB stating that they were unable to meet the May 31, 2009 deadline. With that in mind, the FTB has extended the deadline for filing a completed FTB Form 3726 to satisfy the DISA reporting requirement to October 15, 2009. Thereafter, in order to satisfy the requirement, a taxpayer must submit a completed FTB Form 3726 along with an amended tax return, which must be filed before any relevant statute of limitations has expired. Details of the annual disclosure requirement for DISA transactions were previously reported. (TAXDAY, 2009/02/24, S.7, TAXDAY, 2009/02/27, S.4)

   
FTB Notice 2009-05 , California Franchise Tax Board, July 17, 2009
 

CCH (cch.taxgroup.com) reports:

  The House Ways and Means and Senate Health, Education, Labor and Pensions (HELP) Committees each passed separate versions of health care reform legislation as President Obama made a Rose Garden appeal to Congress to pass House and Senate health care reform bills before the August recess. However, several impediments developed over the course of the week of July 13 that could delay his timetable. Settlement talks appear to be continuing between the IRS and Swiss banking giant UBS AG; a federal district court granted their request for additional time to resolve their dispute over the disclosure of account holders. In addition, the IRS updated its rosters of "listed transactions" and "transactions of interest." The Service also announced the first in a series of public meetings about its oversight of return preparers.

Congress

  The Ways and Means Committee approved the America's Affordable Health Choices Bill of 2009 (HR 3200) early on July 17 by a vote of 23 to 18 (TAXDAY, 2009/07/20, C.1). The plan would overhaul the nation's health care system and impose a surtax of $544 billion on wealthier taxpayers. The measure now heads to the House Rules Committee, where it will be amended again before heading to the House floor.

  Three Democrats, Reps. Earl Pomeroy, D-N.D, Ron Kind, D-Wis., and John Tanner, D-Tenn., voted with the Republicans against the measure. House Speaker Nancy Pelosi, D-Calif., told reporters that Democratic leaders are still negotiating to win support from the conservative members of the House Blue Dog Coalition, as well as freshmen Democratic lawmakers. The House provision to raise revenue to help pay for health care reform through a surtax on the wealthy is unlikely to gain any traction in the Senate as several members of the Senate Finance Committee on July 14 let it be known that the provision had little support among Democratic lawmakers.

  The HELP Committee on July 15 passed its $615-billion version of a health care reform bill (TAXDAY, 2009/07/16, C.1). The Affordable Health Choices Bill was approved by a 13 to 10 margin and provides a public insurance option and a pay-or-play mandate for most employers that would require them to provide health insurance for their employees or face a stiff penalty. The measure will eventually be melded with the Senate Finance Committee (SFC) draft legislation before being taken up on the Senate floor.

  The SFC inched closer to completing a draft of its health care reform legislation on July 16 despite news that all reform proposals to date would cause the federal government to spend more on health care more than it would save (TAXDAY, 2009/07/17, C.1). Appearing earlier in the day before the Senate Budget Committee, Congressional Budget Office Director Douglas Elmendorf told the panel that the legislation significantly expands the federal responsibility for health care costs. Elmendorf told lawmakers that the government, however, has two powerful levers for controlling costs: changing Medicare payment rules and limiting the tax exclusion for employer-sponsored insurance. Finance Committee Chairman Max Baucus, D-Mont., later suspended negotiations until July 20, thereby seriously jeopardizing hopes of passing health care reform in the Senate prior to the beginning of the month-long summer recess, which starts on August 7.

  Although the president courted several lawmakers during the week of July 13, there were no visible sign of progress toward meeting his August deadline for completing health care reform. Following a White House meeting on July 16, Sen. Olympia J. Snowe, R-Maine, a swing voter on the Senate Finance Committee (SFC), said it was "overly ambitious" for the Senate to pass a bill before the summer recess. However, she believed it would be possible for the tax-writing panel to finish its mark before the August break and use the summer hiatus for melding the SFC and HELP Committee bills.

  Late in the afternoon on July 17, the president made a brief statement maintaining that health reform will happen in 2009, but acknowledging there would be much debate over its cost and how to pay for it. He warned that failure to act now would lead to crushing long-term deficits and debt.

  The House approved the IRS's fiscal year (FY) 2010 budget on July 16 by a vote of 219-208 (TAXDAY, 2009/07/20, C.2). Under the House bill, the government would allocate $12.1 billion to the IRS for FY 2010.

  Real estate professionals told House lawmakers on July 15 that the first-time homebuyers tax credit enacted in 2008 was unfair to purchasers because less than eight months later Congress passed an even better homebuyer tax credit in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) that does not have to be repaid (TAXDAY, 2009/07/16, C.2). Charles McMillan, 2009 President of the National Association of Realtors (NAR), told the House Small Business Committee that the NAR questions whether the repayment scheme is sound tax policy, since it is not in the best interest of taxpayers or the IRS to maintain a 15-year repayment and/or recapture program for a provision that was in effect for only eight months.

IRS/Treasury

  Litigation. The IRS's dispute with UBS AG may be headed for resolution (TAXDAY, 2009/07/14, M.1). The U.S. and the Swiss Governments asked a federal district court for additional time to continue discussions about a settlement. The IRS wants the bank to disclose the names of individuals who may have allegedly used their accounts for tax evasion.

  Listed Transactions. The IRS released updated rosters of listed transactions and transactions of interest (Notice 2009-55, TAXDAY, 2009/07/16, I.3; Notice 2009-59, TAXDAY, 2009/07/16, I.4). The listed transaction roster reflects additions and deletions made by the IRS since 2004.

  Return Preparers. The IRS will hold a public meeting in Washington, D.C. on June 30 to hear opinions and suggestions about its oversight of return preparers (IR-2009-66; TAXDAY, 2009/07/15, I.1). Practitioner professional groups and consumer associations are scheduled to speak at the meeting.

  In related news, Karen Hawkins, director of the IRS Office of Profession Responsibility (OPR), indicated that the IRS is taking a wide view of the return preparer community in its study (TAXDAY, 2009/07/15, I.2). The study will focus on preparers but will also look at software manufacturers and banks that engage in refund anticipation loans, Hawkins reported.

  Research Tax Credit. Proposed regulations would simplify the election of the reduced research credit (NPRM REG-130200-08; TAXDAY, 2009/07/16, I.1). The proposed regulations explain that the election is made on Form 6765, Credit for Increasing Research Activities, which should be attached to the return instead of requiring the election to be made "on an original return."

  Offers-in-Compromise. The IRS has revised Form 656, Offer in Compromise, into two new forms to aid ease of use by taxpayers (TAXDAY, 2009/07/16, I.6). The new forms are Form 656, Offer in Compromise, and Form 656-B, Offer in Compromise Booklet.

  Nonprofits. Recent guidance from the IRS should prove helpful to nonprofits, Jane M. Searing, CPA, shareholder, Clark Nuber, PS, Bellevue, Wash., told CCH. In Rev. Proc. 2009-32, I.R.B. 2009-28, 142 (TAXDAY, 2009/07/01, I.2), the IRS issued reliance criteria for private foundations and sponsoring organizations with donor advised funds to determine if a grantee is a public charity and if the grantee is a Type I, II or III supporting organization for purposes of excise taxes imposed on grants by the Pension Protection Act of 2006 (PPA) (P.L. 109-280).

  "We have been telling clients that the IRS Business Master File (BMF) was the best source currently, although not previously cited as an acceptable source," Searing noted. "It is interesting to me that the IRS is allowing organizations to rely upon third party providers to get this information," Searing added. "Organizations obtaining the information this way should include in the contract with the third party that the third party understands how the foundation or donor advised fund sponsor is using the data, that the data will be in the required format, and that the third party will indemnify them from any penalties incurred as a result of relying upon these third party reports for these purposes."

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

CCH (cch.taxgroup.com) reports:

 
Code Sec. 162(k)(1) precluded a corporation from claiming deductions under Code Sec. 404(k)(1) with respect to redemption payments that it made to reacquire its preferred stock from its employee stock ownership plan (ESOP). Code Sec. 162(k)(1) disallows deductions for any amounts paid or incurred by a corporation in connection with the reacquisition of its own stock. Therefore, even if the amounts paid by the corporation were applicable dividends under Code Sec. 404(k)(1), the amounts could not be deducted.

  The corporation's argument that Code Sec. 162(k)(1) did not apply because while the payments to the trust were made in connection with a redemption, the subsequent distribution of the benefits to the participants was not, was rejected. Under Code Sec. 404(k)(2)(A)(ii), dividends must be both paid by the corporation to the plan and distributed in cash to the participants in order to be eligible for the deduction. Although the corporation correctly contended that there would be no allowable deduction under Code Sec. 404(k)(1) without the plan's benefit distribution to the participant, no distribution from the ESOP would be deductible unless the corporation made the dividend payment to the plan.

  Affirming a DC N.J. decision, 2007-2 USTC ¶50,582

Conopco, Inc., CA-3, 2009-2 USTC ¶50,492

Other References:

 
Code Sec. 162

  CCH Reference - 2009FED ¶9052.23

 
Code Sec. 316

  CCH Reference - 2009FED ¶15,704.426

 
Code Sec. 404

  CCH Reference - 2009FED ¶18,371.30

  Tax Research Consultant

  CCH Reference - TRC RETIRE: 75,204

CCH (cch.taxgroup.com) reports:

  The government was enjoined from proceeding with a collection action against an individual during the pendency of the individual's refund proceeding and its request for a stay with respect to the refund proceedings was denied. The individual filed a refund action to recover trust fund recovery penalty taxes he had paid; subsequently, the government brought suit in a different district court to collect the unpaid portion of the trust fund recovery penalty from the individual and another responsible person. Code Sec. 6331(i)(4)(A) prohibits the government from filing a collection action against a refund claimant for any unpaid divisible tax while a refund suit is pending with respect to that individual and that tax. The government could not rely on the exception to Code Sec. 6331(i)(4)(A), which states that the statute does not apply to any "proceeding relating to" the refund proceeding. A collection action will always have some connection, relation and reference to a refund proceeding involving the same taxes and taxpayer; however, taking into consideration the language of the statute, its legislative history and subsequent decisions, the exception was not meant to apply in a collection action against the same taxpayer to recover the same tax at issue in the refund proceeding.

J.D. Nickell, Sr., DC Tex., 2009-2 USTC ¶50,491

Other References:

 
Code Sec. 6331

  CCH Reference - 2009FED ¶38,187.024

  CCH Reference - 2009FED ¶38,187.37

 
Code Sec. 6672

  CCH Reference - 2009FED ¶39,780.74

  Tax Research Consultant

  CCH Reference - TRC IRS: 51,054.25

CCH (cch.taxgroup.com) reports:

  By a vote of 219 to 208, the House late on July 16 approved legislation providing an IRS budget of $12.1 billion for fiscal year (FY) 2010. Four Republicans joined 215 Democrats to vote for the bill; 38 Democrats joined 170 Republicans in voting against the bill. The IRS budget was included in the Financial Services and General Government Appropriations Bill, 2010 (HR 3170). The measure appropriates funds for the Treasury, the White House and executive offices, the judiciary and independent agencies.

  The IRS budget fully funds the Obama administration's budget request and is a $600-million increase over the IRS's FY 2009 budget. The proposed budget includes $5.5 billion for tax enforcement, an increase of $387 billion, and $2.27 billion for taxpayer services, a $19-million decrease that omits one-time costs to provide economic stimulus payments. The taxpayer services budget includes $206 million for the Taxpayer Advocate Service and $680 million for pre-filing taxpayer assistance and education.

  The IRS budget appropriates $4.1 billion for operations support, a 5-percent increase, and $253 million for business systems modernization, a 10-percent increase. The bill provides $149 million for the Treasury Inspector General for Tax Administration and $2 million for the IRS Oversight Board.

  The bill also directs the IRS to make a priority of improving and increasing staffing for taxpayer telephone help lines. The Appropriations Committee report (HRRepNo 111-202) encourages the IRS to continue efforts to ensure that its enforcement actions do not cause unnecessary problems for taxpayers facing economic difficulties. The report also directs the IRS to update the Taxpayer Assistance Blueprint within 90 days of the bill's enactment.

  The committee report noted a recent Government Accountability Office report identifying several information security weaknesses; the bill directs the IRS to institute procedures to safeguard the confidentiality of taxpayer information. The report also spotlights the IRS's plan to study paid tax preparers.

  The Obama administration issued a statement of administration policy (SAP) July 15 that applauded the bill's commitment to stepped-up tax enforcement and improved taxpayer service (TAXDAY, 2009/07/16, O.3). It said that IRS tax enforcement is a critical program supporting the administration's efforts to improve tax fairness and close the tax gap. The SAP estimated that IRS tax fraud efforts recoup $5 for every $1 spent.

  The Senate Appropriations Committee approved an IRS budget of $12.15 billion on July 9 (TAXDAY, 2009/07/10, C.3). The Senate is expected to take up the budget before Congress's August recess.

  By Brant Goldwyn, CCH News Staff

Tax-Related Sections of House Appropriations Committee Report on HR 3170, Financial Services and General Government Appropriations Bill, 2010, HRRepNo 111-202
 

CCH (cch.taxgroup.com) reports:

  The America's Affordable Health Choices Bill of 2009 (HR 3200) was approved by the House Ways and Means Committee early on July 17. By a vote of 23 to 18, the committee approved a plan to overhaul the nation's health care system and impose a surtax of $544 billion on wealthier taxpayers. The next step for the legislation will be to go to the House Rules Committee, where it will be amended again before heading to the House floor.

  Three Democrats, Reps. Earl Pomeroy, D-N.D, Ron Kind, D-Wis., and John Tanner, D-Tenn., voted with the Republicans against the measure. House Speaker Nancy Pelosi, D-Calif., told reporters that Democratic leaders are still negotiating to win support from the conservative members of the House Blue Dog Coalition, as well as freshmen Democratic lawmakers.

  In addition, the Congressional Budget Office (CBO) has yet to release a cost estimate of the bill. GOP lawmakers questioned how Democrats could support a 1,018-page health care reform bill when even preliminary CBO estimates show it will increase the federal budget deficit by $1 trillion over 10 years. Pelosi has promised that the bill will be paid for by Medicare and Medicaid cost containment provisions as well as the surtax on the wealthy.

  Under HR 3200, approximately $544 billion in revenues would be raised through a surtax of 5.4 percent on married individuals with adjusted gross income (AGI) over $1 million beginning in 2011; a 1.5-percent surtax on incomes between $500,000 and $1 million; and a 1-percent surtax on incomes from $350,000 to $500,000. The measure is expected to be considered by the full House before the August recess.

  By Stephen K. Cooper, CCH News Staff

Ways and Means Committee Press Release: Ways and Means Passes Historic Health Reform Legislation

House Ways and Means Committee Release: America's Affordable Health Choices Act Section-by-Section Analysis (Updated to Include Changes in the Amendment in Nature of a Substitute)
 

Tax Analysts report: