Tax News

CCH (cch.taxgroup.com) reports:

  The Georgia Department of Revenue has amended its personal income tax rule covering the withholding on distributions to nonresident members of partnerships, S corporations, and limited liability companies. The rule conforms to statutory changes that reduced the penalty from 100% to 25% on pass-through entities that fail to withhold tax on distributions. Withholding is required with respect to distributions paid, or distributions credited but not paid, to a nonresident member. The due date for taxes deducted and withheld on distributions credited but not paid by the entity to its nonresident members is the due date for filing the income tax return for the entity. In lieu of withholding, the entity may elect to file a composite income tax return for one or all of its nonresident members using Form IT-CR.

  Subscribers to CCH Tax Research NetWork can view the regulation.

Reg. Sec. 560-7-8-.34 , Georgia Department of Revenue, effective January 18, 2009

 

CCH (cch.taxgroup.com) reports:

  The California Franchise Tax Board (FT has addressed frequently asked questions (FAQs) regarding the new penalty applicable for taxable years beginning on or after January 1, 2003, to corporations that have an understatement of California corporation franchise or income tax in excess of $1 million. Details of the new law were previously reported. (TAXDAY, 2008/10/02, S.2)

  The FAQs address questions regarding what the penalty is, what an understatement of tax is, what tax years are subject to the penalty, who is subject to the penalty, how the penalty is computed, when the FTB will assess the penalty, and more.

  The penalty is 20% of the entire amount of the understatement. The understatement is measured by the difference between the tax reported on the original return or shown on an amended return, filed on or before the extended due date, and the correct tax liability.

  For the purpose of this penalty for taxable years 2003-2007, a taxpayer can file an amended return and pay the tax shown on the amended return by May 31, 2009, to treat the tax shown on the amended return as tax shown on the original return. This will increase the self-assessed tax base against which the understatement is measured to reduce the likelihood of receiving this penalty for these taxable years.

  The FTB will issue an FTB Notice and provide additional FAQs in the near future to prescribe procedures on the following subjects:

  -- the filing of amended returns under Rev. & Tax. Code Sec. 19138(b);

  -- the payment of the amount shown on the amended return under Rev. & Tax. Code Sec. 19138(b); and

  -- the method to alleviate the burden of filing amended returns in situations involving pending, disputed, and final proposed assessments.

  Concerns and recommendations related to the FAQs should be sent via e-mail to Ting Lee at ting.lee@ftb.ca.gov.

  Subscribers to CCH Tax Research NetWork can view the FTB release.

Large Corporate Understatement Penalty FAQs , California Franchise Tax Board, January 21, 2009

 

CCH (cch.taxgroup.com) reports:

  The U.S. Court of Appeals for the First Circuit has upheld a federal court's decision that the taxpayer's tax accrual workpapers, the contents of which were communicated to an independent auditor, were not revealed to an adversarial party and, therefore, did not forfeit protection under the work product privilege. However, the court vacated and remanded the lower court's determination that the communications were not a complete waiver of the privilege. On remand, the lower court must decide to what extent the independent auditor's own workpapers can be disclosed without violating the taxpayer's work product privilege.

  CCH Comment. Kevin Kenworthy, partner, Miller & Chevalier, Washington, D.C., commented immediately after the release of the First Circuit's opinion that "while the Appeals Court has ruled largely affirming the decision in favor of Textron, the fight is not over yet. While in many respects the court made a favorable decision for taxpayers, the dust has not settled. The case could go as far as the U.S. Supreme Court and Textron could end up losing. Corporate taxpayers need to continue watching the case because a final verdict against Textron could give the IRS an extra tool to find out what companies really believe about their tax returns."

Work Product Protection Applied

  The First Circuit upheld the district court's ruling that documents prepared by Textron for the purpose of calculating its tax reserves were protected by the work product privilege. The taxpayer prepared its tax accrual workpapers in anticipation of litigation because they would not have been created "but for the prospect of litigation." The taxpayer's tax accrual workpapers would not have been prepared "but for" the need to estimate the likelihood of success in litigation in order to establish a reserve fund to cover positions for which the taxpayer could foresee disputes with the IRS. Anticipation of a tax dispute with the IRS could qualify as anticipation of litigation for purposes of the work product doctrine. The resolution of disputes through adversarial administrative processes such as proceedings before the IRS Appeals Board met the definition of litigation.

  The IRS's argument that the taxpayer's legal requirement to calculate and report a tax reserve fund rendered the tax accrual workpapers as prepared in the ordinary course of business versus in anticipation of litigation was rejected. The workpapers were "dual purpose" documents protected by the work product doctrine because "the business purpose derives from and is inextricably relate to anticipating litigation."

No Specific Litigation Reporting Required

  The court also ruled that the taxpayer should not be required to report a particular instance of litigation for each prepared tax accrual workpaper in order to prevent the work product doctrine from growing so broad as to swallow the attorney-client privilege. Such a requirement would offer protection under the work product privilege to only "the cantankerous and combative taxpayer who intends to thoroughly litigate every position. "

Independent Auditor

  The taxpayer did not waive protection under the work product privilege by showing its tax accrual workpapers to an independent auditor. The taxpayer's relationship with the auditor did not waive this protection, as it was not adversarial but, rather, cooperative in nature. The appellate court reasoned that this was different from a previous case ( Massachusetts Institute of Technology, CA-1, 97-2 USTC ¶50,955), where an auditor reviewed a client's financial statements to identify litigious disputes it would subsequently have with the client.

  However, despite the work product protection of the taxpayer's tax accrual workpapers, the independent auditor itself may be required to disclose its own resulting workpapers. The IRS argued that, despite any professional confidentiality obligations, the auditor may be required to disclose information to the Securities and Exchange Commission to protect stockholders or respond to valid subpoenas. While this is true, the court found that the remaining issue was whether disclosure of the auditor's workpapers to the IRS would substantially increase the risk that the contents of the taxpayer's workpapers would be disclosed to "an adversary."

  Although the IRS had requested the auditor's tax accrual workpapers, the lower court made no factual rulings on their contents. Thus, the court remanded to the case to the lower court to perform an in camera inspection or testimonial proceeding on the documents to make this assessment.

  Affirming in part, reversing in part and remanding a DC R.I. decision, 2007-2 USTC ¶50,605.

  By Torie Cole, CCH News Staff

Textron Inc., CA-1, 2009-1 USTC ¶50,167

Other References:

 
Code Sec. 7525

  CCH Reference - 2009FED ¶42,816F.25

 
Code Sec. 7602

  CCH Reference - 2009FED ¶42,827.33

  CCH Reference - 2009FED ¶42,827.5036

  Tax Research Consultant

  CCH Reference - TRC IRS: 21,400

  CCH Reference - TRC IRS: 21,402.35

  CCH Reference - TRC IRS: 21,404

 

CCH (cch.taxgroup.com) reports:

  The massive economic stimulus bill made its way through the House Ways and Means Committee on January 22, with lawmakers approving the $275 billion measure by a vote of 24 to 13. Democrats rejected dozens of GOP amendments to Chairman Charles B. Rangel's, D-N.Y., chairman's mark of the American Recovery and Reinvestment Tax Bill of 2009 (HR 598). Ranking member Dave Camp, R-Mich., said the best chance for Republican lawmakers to influence the bill is to persuade President Obama that a 5-percent income tax rate cut for taxpayers in the 10 percent and 15 percent tax brackets would be a more effective way to stimulate the economy and reach a larger number of Americans. Rangel and the House Democratic leadership believe that the $145.3 billion Making Work Pay tax credit of $500 to individuals and $1,000 to couples is a better plan.

  Rangel said the tax bill will be married to a larger spending bill package now under consideration by the House Energy and Commerce and the House Appropriations committees. The combined legislation, which will then be called the American Recovery and Reinvestment Bill (HR 1), will reach a vote on the House floor on January 28. Since the legislation is moving so quickly, without the benefit of committee hearings, Camp said that he hopes Obama will prevail on Senate lawmakers to modify the bill with their tax proposals. He acknowledged that House Speaker Nancy Pelosi, D-Calif., has tasked Rangel with moving the legislation as quickly as possible.

  In an attempt to assuage criticism of the tax proposal by GOP lawmakers, Rangel offered to hold an informal, bipartisan meeting with Republicans and Obama administration officials. The meeting, which has not been scheduled, would seek to determine an estimate of the number of jobs created by the proposed legislation. Rangel said he was forced to skip the regular hearing process in order for Congress to get a finished bill to Obama's desk before Presidents Day in February.

  The committee voted on a modified version of the tax legislation that was released by Rangel late on January 21, which revised the original version of HR 589. The Joint Committee on Taxation also released update revenue estimates of the modified legislation. The revised tax bill would allow companies a five-year carryback period for operating losses. It would expand qualified school construction bonds, qualified energy conservation tax credit bonds and recovery zone economic development bonds and recovery zone facility bonds. The measure also clarifies that Notice 2008-83, I.R.B. 2008-42, 905 (TAXDAY, 2008/10/01, I.2, which allows financial institutions to use net unrealized built-in losses after an ownership change, shall have the force and effect of law with respect to new and previously announced ownership changes of companies occurring after January 16, 2009.

  By Stephen K. Cooper, CCH News Staff

Chairman's Amendment in the Nature of a Substitute to HR 598

Summary of Changes in the Chairman's Amendment in the Nature of a Substitute to HR 598

Ways and Means Passes Economic Recovery Legislation

Neal Welcomes Ways and Means Committee Passage of Economic Stimulus Proposal

JCT Description of Title I of HR 598, the American Recovery and Reinvestment Tax Act of 2009,
JCX-5-09

JCT Description of Title III of HR 598, the Health Insurance Assistance for the Unemployed Act of 2009, JCX-6-09

JCT Estimated Budget Effects of the Revenue Provisions in Titles I and III of HR 598, the American Recovery and Reinvestment Tax Act of 2009, JCX-7-09

JCT Description of the Chairman's Amendment in the Nature of a Substitute to Titles I and III of HR 598, JCX-8-09

JCT Estimated Budget Effects of the Chairman's Amendment in the Nature of a Substitute to HR 598, the American Recovery And Reinvestment Tax Act of 2009, JCX-9-09