Tax News

CCH (cch.taxgroup.com) reports:

  Massachusetts Gov. Deval Patrick has released a proposed budget for fiscal year 2010 that would:

  -- eliminate existing sales tax exemptions on alcoholic beverages, sweetened beverages, and candy;

  -- increase the state meals and hotel occupancy taxes by 1%;

  -- authorize cities and towns to impose a 1% local option tax on meals and increase local option hotel taxes by 1%;

  -- eliminate property tax "loopholes" applicable to telecommunications companies;

  -- increase motor vehicle registration fees; and

  -- require disclosure, on the tax credit disclosure/accountability Web site currently being developed, of the names of taxpayers who receive refundable or transferable tax credits and the number of jobs created through these credits.

  Budget documents are available on the Governor's Web site at
http://www.mass.gov/bb/h1/fy10h1/msg10/hdefault.htm.

FY2010 Budget Narrative , Massachusetts Gov. Deval Patrick, January 28, 2009
 

CCH (cch.taxgroup.com) reports:

  The California Franchise Tax Board has issued a legal ruling clarifying the application of the real estate mortgage investment conduit (REMIC) excess inclusion rules for members of a California franchise tax unitary combined reporting group. The minimal amount of a California noneconomic residual interest (NERI) holder's excess income from a REMIC that is reported on the NERI holder's tax return must be determined on a post-apportioned basis if the NERI holder is included in a California combined report. Furthermore, the minimal excess income amount is not included in the NERI holder's gross income or taxable income for purposes of calculating the NERI holder's California net operating loss carryforward.

Legal Ruling 2009-01 , California Franchise Tax Board, January 26, 2009,
¶404-839

  Other References:

  Explanations at ¶10-365

CCH (cch.taxgroup.com) reports:

  A corporation that redeemed shares of its common stock held by a trust that in turn used the proceeds to satisfy distributions to terminated employees who cashed out of an employee stock ownership plan (ESOP) was not entitled to a tax deduction under Code Sec. 404(k)(1) for the payments to the employees.

  Under the terms of the ESOPs set up by the corporation, when a participant left the corporate employer, the ESOP trust distributed to the participant in cash or stock the value of the participant's ESOP account. If the participant elected cash, the trust would ask the corporation to purchase its own stock from the trust to fund the distribution. The corporation would buy the stock and make the payments (which the parties agreed were equivalent to dividends for purposes of Code Secs. 301 and 316). The trust then distributed the cash to the participant.

  These two steps - the payment of a dividend to the trust followed by the distribution of the amount to the participant - meant that the payments were applicable dividends under Code Sec. 404(k)(2)(A)(ii), and such dividends are normally deductible under Code Sec. 404(k)(1). However, Code Sec. 162(k)(1), which prohibits otherwise allowable deductions by a corporation for amounts paid in connection with reaquiring its own stock, prohibited the corporation from claiming the deduction.

  CCH Comment. The IRS pointed out in Rev. Rul. 2001-6, 2001-1 CB 491, which prohibited a deduction under a similar set of facts, that application of Code Sec. 404(k) to redemption amounts would allow employers to claim deductions for payments that do not represent true economic costs, and it would eliminate important rights and protections for recipients of ESOP distributions, including the right to reduce taxes by using the return of basis provisions under Code Sec. 72, the right to make rollovers of ESOP distributions received upon separation from service, and the protection against involuntary cash-outs.

  CCH Comment. The court declined to follow the Ninth Circuit's decision in Boise Cascade Corp. , CA-9, 2003-1 USTC ¶50,472; rather, it is in line with the Tax Court's recent decision in Ralston Purina Co. , 131 TC --, No. 4, Dec. 57,534, as well as
Reg. §§1.62(k)-1(c), and 1.404(k)-3, which the IRS issued in response to Boise . The district court's take in General Mills, Inc. , DC Minn., 2008-1 USTC ¶50,141, essentially followed the holding in Boise Cascade that Code Sec. 162(k)(1) would only apply, if at all, to the initial step (the payment made to the trust in the stock repurchase), which by itself is not otherwise deductible.

  Also, the district court concluded that Code Sec. 162(k)(1) only prohibits deductions for fees and expenses that are necessary and incident to the repurchase of the stock, rather than the amount paid for the stock itself. The Court of Appeals rejected both positions.

  CCH Comment. An approach not taken by the Court of Appeals was to use Code Sec. 404(k)(5)(A), under which the IRS can disallow a Code Sec. 404(k)(1) deduction for tax-avoidance reasons. This was the approach advocated by the concurring opinion in Ralston Purina .

  Reversing and remanding a DC Minn. decision, 2008-1 USTC ¶50,141.

General Mills, Inc. & Subsidiaries, CA-8, 2009-1 USTC ¶50,177

Other References:

 
Code Sec. 162

  CCH Reference - 2009FED ¶9052.01

  CCH Reference - 2009FED ¶9052.23

 
Code Sec. 404

  CCH Reference - 2009FED ¶18,371.30

  Tax Research Consultant

  CCH Reference - TRC RETIRE: 75,204

CCH (cch.taxgroup.com) reports:

  An accrual based parent corporation was required to include in its consolidated income deferred payments from the sale of barges manufactured by its subsidiary. Under the contract to sell the barges, a portion of the payments were due 18 months after the delivery of each barge. The deferred payments were excluded by the parent because they were withheld by customers in order to offset agreed-upon damages incurred under a previous barge sale contract.

  As an accrual basis taxpayer, the parent was required to accrue the deferred payments for the barges in the year that all of the events occurred to fix the right to the income. The delivery of the barges unconditionally fixed the right to receive the full contract price, including the deferred payments, in the year of delivery. The customers' offset claim did not prevent the accrual of the income. The customers did not dispute the fact or the amount of the obligation under the contract and there was no question as to whether the right to receive income was vitiated by a contractual provision for withholding a portion of the sales price. The offset claims affected only the timing of the receipt of the income under the contract and not the right to receive the income. Moreover, the deferred payments did not fall within the income-accrual exception because there was no evidence that the deferred payments were uncollectible as a result of insolvency, bankruptcy or other financial conditions of the customers. It was only in the tax year after the barges had been delivered and the right to income had been fixed that the customers asserted their right to an offset for the damages from the previous contract.

  Additionally, the withheld deferred payments could not be deducted in the year as an amount transferred to satisfy a contested liability in the tax year the income accrued. The withholding of the deferred payments did not constitute a transfer of property in the same tax year in satisfaction of a liability. In the year the barges were delivered and the income accrued, the deferred payments were not yet due and so could not have been withheld. Additionally, the withholding of the deferred payments did not constitute a transfer. The deferred payments withheld by the customers were not in the control of the subsidiary. In the year the income accrued, there was no order of any competent legal authority to force the subsidiary to transfer the funds that were owed.

Trinity Industries, Inc., 132 TC No. 2, Dec. 57,718

Other References:

 
Code Sec. 451

  CCH Reference - 2009FED ¶21,005.756

 
Code Sec. 461

  CCH Reference - 2009FED ¶21,817.225

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 9,050

  CCH Reference - TRC ACCTNG: 12,058
 

CCH (cch.taxgroup.com) reports:

  Calling it an investment in America's future, House Democratic leaders successfully passed the American Recovery and Reinvestment Bill of 2009 (HR 1) on January 28. The party-line vote of 244 to 188 came at the end of a day-long legislative session in which GOP lawmakers sought to portray the measure as an ineffective, tax-and-spend liberal package that would do little to help end the U.S. recession, create jobs or help struggling families. The House action was the latest step in an effort to get economic stimulus legislation to President Obama's desk before the Presidents Day recess in mid-February. The Senate is expected to shortly vote on its version of the legislation, which includes different tax provisions and might win more GOP support.

  The centerpiece of the tax provisions in the House's $825 billion bill is the Making Work Pay tax credit, which would provide a $145.3 billion refundable credit to families and individuals in their paychecks. The provision, which GOP lawmakers wanted to replace with targeted tax incentives and a cut in marginal tax rates, was intended to help middle-income taxpayers who did not benefit from the tax policies supported by former President Bush in the last eight years, Democrats charged. Congress is saying, in effect, that trickle-down economics has not worked, said Rep. John Lewis, D-Ga., who is a member of the House Ways and Means Committee. "We are saying that the people's resources should be used to benefit the greatest number of citizens in their time of need," he added.

  Eleven Democrats voted against the bill. The measure ran into trouble with the conservative House Democratic Blue Dog Coalition, which favors following pay-as-you-go (PAYGO) budget rules as a way to shrink the budget deficit. Rep. Charlie Melancon, D-La., said he voted for the measure following a commitment by the Obama administration that it will support efforts to follow PAYGO rules.

  Democrats soundly defeated an alternative proposal from Ways and Means ranking member Dave Camp, R-Mich., and Rep. Tom Price, R-Ga. GOP lawmakers said they raised their concerns about HR 1 with Obama, but the bill still includes unnecessary federal spending. "The bulk of the tax cuts are simply rebate checks --$10 a week for individuals and $20 a week for couples. We tried rebate checks last year and they simply don't work," said Ways and Means member Paul Ryan, R-Wis.

  President Obama said he was grateful for the House vote on the economic package but hopes the Senate will "strengthen" the plan before it reaches his desk. Obama said the House package will provide "billions of dollars of immediate tax relief "to working families and save or create 3 million jobs over the new few years. Obama did not explain what areas of the bill need to be changed but stressed the importance of moving on the package swiftly. Earlier in the day after a meeting with business leaders (TAXDAY, 2009/01/29, W.1), the president said he hoped to sign an economic recovery bill "in the next few weeks."

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

American Recovery and Reinvestment Tax Act of 2009, as Reported by the House Ways and Means Committee, HR 598

Ways and Means Press Release: Economic Recovery Plan Passes House of Representatives

Ways and Means Press Release: Ways & Means Democrats Support American Recovery and Reinvestment Plan

White House Press Release: Statement of the President on the House Passage of the American Recovery and Reinvestment Act

SFC Press Release: Finance Panel Votes to Create Jobs, Cut Taxes for Working Families and Small Businesses in Economic Recovery Plan