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November 30, 2010

Federal Headlines

IRS Issues Guidance for In-Plan Roth Rollovers from Non-Roth Accounts (Notice 2010-84)

 

The IRS has issued guidance regarding in-plan Roth rollovers. Code Sec. 401(k), Code Sec. 403(b) and Code Sec. 457(b) government plans are permitted under amendments to Code Sec. 402A(c) by the Small Business Jobs Act of 2010 (P.L. 111-240) to allow in-plan Roth rollovers for eligible rollover distributions made after September 27, 2010, from a non-Roth account into a designated Roth account in the same plan.

 

Eligible rollover distributions. The guidance makes it clear that existing statutory restrictions on distributions of elective deferrals from the defined contribution account have to be satisfied before an in-plan Roth rollover can be made. So, for example, in the case of a 401(k) plan participant who has not had a severance from employment, an in-plan Roth rollover from the participant's pre-tax elective deferral account is permitted only if the participant has reached age 59-1/2, has died or has become disabled, or receives a qualified reservist distribution.

 

CCH Comment. The guidance confirms something that came as a surprise to those who initially assumed the new law would allow unrestricted in-service transfers from non-Roth to Roth accounts for any vested amount in a participant's account.

 

Plan amendments and deadlines. Plans will have to be amended to allow for in-plan Roth rollovers. A plan can be amended to allow new in-service distributions from the plan's non-Roth accounts (subject to the otherwise applicable distribution limitations) conditioned on the participant rolling over the distribution in an in-plan Roth direct rollover (however, the plan cannot impose this condition on any existing distribution options available under the plan). The guidance provides extended amendment deadlines for 401(k) and 403(b) plans to allow 2010 in-plan Roth rollovers as long as the amendment's effective date is the date the plan first operated in accordance with that amendment. Deadlines are:

 

--401(k) plans have until the later of the last day of the year in which the amendment is effective or December 31, 2011;

 

safe harbor 401(k) plans have until the later of the day before the first day of the plan year in which the safe harbor plan provisions are effective or December 31, 2011;

 

403(b) plans have until the later of the plan's remedial amendment period or the last day of the first plan year in which the amendment is effective; and

 

457(b) government plans may adopt an amendment to include a designated Roth account after December 31, 2010, and then allow in-plan Roth rollovers.

 

Deadline for in-place Roth contribution program. A plan must have a qualified Roth contribution program in place at the time a rollover contribution to a designated Roth account is made in an in-plan Roth rollover. For participants to be eligible for the special two-year income deferral (recognizing income in 2011 and 2012 instead of 2010), the distribution must be made no later than December 31, 2010, and, at the time of the rollover contribution to the designated Roth account, the plan must have a qualified Roth contribution program in place. Although a plan may be amended retroactively to add a qualified Roth contribution program, such a program is in place on a given date only if, with respect to compensation that could be deferred beginning with that date, eligible employees are given an opportunity to elect on that date to have designated Roth contributions made to the plan (or would have such an opportunity but for a statutory or plan limitation on the amount of an employee's elective deferrals).

 

In-plan Roth rollovers not treated as distributions. Under the guidance, a distribution rolled over as an in-plan Roth direct rollover is not treated as a distribution for the following purposes: transferring a plan loan to the designated Roth account without changing its repayment schedule; requiring spousal consent; requiring a participant's consent before an immediate distribution of an accrued benefit of more than $5,000; and eliminating a participant's right to optional forms of benefit.

 

The guidance also discusses taxation of 2010 rollovers, notice requirements for plan participants, and reporting requirements for participants and for plans. Recapture rules apply for early distributions of rolled over amounts from a non-Roth account to a designated Roth account, and the guidance provides an ordering rule and an example for such distributions.

Notice 2010-84, 2010FED ¶46,511

Retirement News for Employers - Fall 2010 Edition - In-Plan Roth Rollovers - New Guidance and 2010 Forms 1099-R and 8606 Reporting Instructions

Other References:

 

Code Sec. 402A

 

CCH Reference - 2010FED ¶18,250.034

 

CCH Reference - 2010FED ¶18,250.55

 

Tax Research Consultant

 

CCH Reference - TRC RETIRE: 3,260

 

IRS Publishes Loss Payment Patterns, Discount Factors and Salvage Discount Factors for 2010 (Rev. Proc. 2010-49; Rev. Proc. 2010-50)

 

The IRS has provided insurance companies with tables setting forth the loss payment patterns, discount factors and salvage discount factors for the 2010 accident year. The loss payment pattern discount factor tables are used to compute discounted unpaid losses for each line of business under Code Sec. 846 using discount factors published by the IRS. The salvage discount factors are used by insurers in computing discounted estimated salvage recoverable under Code Sec. 832. The factors were determined using the applicable interest rate for 2010 of 3.81 percent.

Rev. Proc. 2010-49, 2010FED ¶46,513

Rev. Proc. 2010-50, 2010FED ¶46,514

Other References:

 

Code Sec. 832

 

CCH Reference - 2010FED ¶26,157.595

 

Code Sec. 846

 

CCH Reference - 2010FED ¶26,331.11

 
 

State Headlines

Florida --Property Tax: U.S. Supreme Court Declines to Review Assessment Cap Decisions

 

The U.S. Supreme Court has declined to review two Florida property tax cases concerning the assessment cap.

 

In the first case, a class representing nonresidents of Florida who own residential property in the state asked the U.S. Supreme Court whether various provisions of the U.S. Constitution are violated by the manner in which Florida assesses homes for property tax purposes. The class challenged in state court the Florida Constitution's "Save Our Homes Amendment," adopted by referendum in 1994, which places a 3% cap on the amount by which the assessed value of homestead property can be increased annually. Since a "homestead" is defined as the permanent residence of the owner, the class asserted that the effect of the amendment is to shift the tax burden to nonresident owners of second homes in Florida, in violation of the Commerce and Privileges and Immunities Clauses and the constitutional right to travel.

 

The Florida intermediate appellate court upheld the constitutionality of the amendment, holding that the tax benefit was based on the way the property was used, not on the status of the landowner as a resident or nonresident. A Florida resident who owned a second home in the state would not be able to benefit from the assessment cap on that second home. Therefore, there was no unconstitutional discrimination against nonresidents.

 

In the second case, a class of Florida resident homeowners who recently moved to the state asked whether the constitutional right to travel is violated by the manner in which Florida assesses homesteads. Following the adoption of the assessment cap described above, Amendment 1, adopted by referendum in 2008, made a portion of a homesteader's existing exemption portable to newly purchased homestead property.

 

The class challenged these provisions in Florida state court on the basis that, because homesteads acquired by new migrants to Florida are assessed at market value, new residents of the state bear a heavier tax burden than long-term residents, in violation of the U.S. Constitution. The Florida intermediate appellate court affirmed the dismissal of the class's lawsuit based on state precedents and Nordlinger v. Hahn, 505 U.S. 1 (1992).

Lanning v. Pilcher, U.S. Supreme Court, Dkt. 10-281, and Bruner v. Hartsfield, U.S. Supreme Court, Dkt. 10-276, petitions for certiorari denied November 29, 2010

 

Minnesota --Corporate, Personal Income Taxes: Department of Revenue Announces Position on Michigan Business Tax

 

For purposes of the credit against personal income tax and the additions to federal taxable income for individuals and corporations for net income taxes paid to another state, the Minnesota Department of Revenue has determined that the following portion of the Michigan Business Tax (MBT) is a tax based on net income: the business income tax, plus a portion of the surcharge attributable to the business income tax, less credits that reduce the business income tax. The remainder of the MBT is not a tax based on net income.

Revenue Notice No. 10-04 Individual Income and Corporate Franchise Tax - Credits and Additions to Federal Taxable Income - Michigan Business Tax, Minnesota Department of Revenue, November 22, 2010, ¶203-606

 

Other References:

 

Explanations at ¶10-615

 

Explanations at ¶16-825

 

Explanations at ¶16-145

 

Texas --Sales and Use Tax: Motor Vehicle, Hotel Occupancy, and Sales Tax Topics Discussed

 

A Texas Comptroller of Public Accounts newsletter discusses the motor vehicle sales tax treatment of exported vehicles, the hotel occupancy tax treatment of charges by hotels to modify a prepaid reservation, and the sales and use tax treatment of energy drinks, consumables used in construction contracts, items shipped into Texas, occasional sales, and software maintenance services. Local taxes are also discussed.

 
Exported Motor Vehicles

 

A motor vehicle sales tax exemption for vehicles exported for use outside the state was denied because the taxpayer failed to establish that there was no use of the vehicles in Texas prior to export. Documentation indicated that the vehicles were purchased approximately six to eight weeks prior to their commitment to shipment. Registration of the vehicles in Texas created a presumption that the vehicles were for use in Texas.

 
Hotel Fee to Change Reservation on Prepaid Room

 

When a hotel chain charges a fee for a guest to modify a prepaid reservation by shifting occupancy dates, hotel occupancy tax is due on the changed reservation fee if the guest will be staying at the same hotel property. When a prepaid guest moves to another hotel property within the corporation's family of brands, the hotel that held the original reservation will treat the fee to move as a cancellation fee in its records.

 

If the prepaid guest changes the reservation within 30 days of the date of arrival and pays the hotel, in total, the amount necessary to have occupied the room, hotel occupancy tax is due on the changed reservation fee. On the other hand, hotel occupancy tax is not due if the fees charged to move to another hotel property are less than the reserved room rate. Also, tax is not due if the request to move hotel properties is more than 30 days from the scheduled stay, regardless of the amount of fees paid by the guest.

 
Energy Drinks as Food, Soft Drink, or Dietary Supplement

 

Energy drinks can be subject to sales tax as soft drinks or exempt as food or dietary supplements. An energy drink that is labeled with a nutrition facts panel is either a soft drink or a food. Tax is due on energy drinks that meet the definition of a soft drink.

 

Energy drinks with a nutrition facts panel indicating coffee, tea, milk, or more than 50% fruit or vegetable juice by volume are food. A drink meeting the definition of food is not taxable unless it is sold in an individual-sized container of eight ounces or less by a seller who provides eating facilities or is sold ready for immediate consumption if eating facilities are not provided.

 

An energy drink that meets the definition of a dietary supplement is not subject to sales tax even if it is sold ready for immediate consumption or by a place of business with eating facilities.

 
Consumables Used in Construction Contracts

 

With two exceptions, consumables used in construction contracts are taxable to the purchaser at the time of sale. Consumables are items used or consumed by a contractor or service provider on a construction project, such as masking tape, corrugated cardboard, paint pot liners, steel strapping, sandpaper, and trash can liners. Consumables do not include items that are incorporated into realty such as mortar, bricks, nails and caulk.

 

Consumables are not taxable if a contractor issues a resale certificate to a supplier, the contractor is operating under a separated contract that provides that title to the consumables will pass to the contractor's customer upon receipt of the items by the contractor, and no use of the items is made by the contractor prior to passage of title to the customer. In addition, an exemption is allowed for qualifying consumables used in a contract to improve realty for an exempt organization.

 
Items Shipped Into Texas, Occasional Sales

 

An online seller engaged in business in Texas must obtain a Texas Sales and Use Tax Permit and collect and remit tax on the sale of taxable items shipped or delivered into Texas. If an item is taxable, any charges for shipping, handling, transportation, or delivery to a Texas location are also taxable. Likewise, if an item is not taxable, any shipping, handling, transportation, or delivery charges are also not taxable.

 

Sellers who have sales tax permits in Texas or similar licenses or permits in another state may not sell items tax free by claiming the occasional sale exemption.

 
Maintenance by the Seller of Software

 

Generally, software maintenance services (e.g., error correction, improvements, or technical support) are not taxable when provided by a person who did not sell the software but are taxable when provided by the seller of the software. Any person who sold the software within the stream of commerce (including the manufacturer, wholesaler, retailer, or other reseller) is responsible for collecting tax when performing maintenance on that software even if that person did not sell the software directly to the customer.

 

A software maintenance service company may contract with a third party for the performance of maintenance services on some software. In this situation, if neither the service company nor the third party is a seller of the software on which the service is performed, then no tax is due on the service company's charge to its customer or the third party's charge to the service company. Both entities are providing a nontaxable service.

 

If the software maintenance company is a seller of the software on which the third party performs the maintenance, then the service company should collect tax on its charge to customers for that service. If both the service company and the third party are sellers of the software, the service company may issue a resale certificate to the third party in lieu of paying tax.

 
Local Taxes

 

Generally, local sales taxes are due based on the location of the seller's place of business. A seller may be required to collect local use taxes in effect at the point of delivery if the seller is engaged in business in that local taxing jurisdiction.

 

If an order is shipped or delivered from a warehouse or other location in Texas that is not a place of business of the seller, local sales taxes are due based on the location of the seller's place of business where the order was received.

 

If an order is placed with a seller in Texas, but the item is drop-shipped to the purchaser by a third-party supplier outside the state, local sales tax is due based on the location of the seller's place of business where the order was received.

 

When an item is shipped or delivered from the seller's place of business in Texas, the seller charges sales taxes based on the location of that place of business, regardless of whether the order was received at a different place of business in Texas.

 

When a seller receives an order at a place of business in Texas, and the items are shipped or delivered to Texas customers from the seller's out-of-state location, local use taxes are due based on the point of delivery.

 

The complete newsletter is available on the Comptroller's Web site at http://window.state.tx.us/taxinfo/taxpnw/tpn2010/tpn1011.html.

Tax Policy News, Texas Comptroller of Public Accounts, November 2010

 
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