New regulations address when a controlled foreign corporation (CFC) that is a “principal” in a “contract manufacturing” (or similar) arrangement can come within the “manufacturing exception” of Code Sec. 954(d)(1), and also provide guidance on various issues under the branch rule provisions of Code Sec. 954(d)(2). The final regulations clarify that a CFC cannot sell property that is different from the property it purchases, claim it is a manufacturer with respect to the property, and avoid foreign base company sales income. The final regulations also provide a new “substantial contribution” test through which a CFC can qualify for the manufacturing exception without physically manufacturing the property. The temporary regulations provide guidance under the branch rule provisions particularly with respect to determining the location of manufacturing for applying the rules when there are manufacturing related activities performed by the CFC in more than one location. In an excellent article in the International Tax Journal Hal Hicks and David Sotos provide a comprehensive analysis of the new regulations and the impact on business.

The Journal of State Taxation offers a timely article by Kathleen K. Wright on the current budget crisis in many states and the tax revenue approaches being taken to address the mounting state budget deficits, with an emphasis on the tax provisions enacted in recent California budget bills.

In order to clarify some confusion regarding the NOL Carryback Rules, the IRS issued Rev. Proc. 2009-26, IRB 2009-19, which provides that electing small businesses (ESBs) that missed the April 17, 2009, deadline to make an election to claim a three-, four- or five-year carryback period for 2008 net operating losses (NOLs) have another opportunity to take advantage of this tax break. Interested taxpayers need to either file: • Form 1045, Application for Tentative Refund; • Form 1139, Corporation Application for Tentative Refund; or • an amended federal income tax return. For this and all the latest breaking federal tax news, the Federal Tax Course Letter, written by Susan Flax Posner, keeps you up to date with the latest developing tax news.

With governments looking for additional revenue during tough economic times, the increased possibility of a tax audit is the top tax risk facing organizations, according to a recent survey of senior business professionals. Some 30 percent of respondents polled during a Tax Governance Institute (TGI) Web cast ranked the possibility of a tax audit as their organization’s most significant task risk. Corporate tax executives and their advisors will be interested in reading the Executive’s Tax and Management Report for insight into this and other breaking tax issues.