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February 23, 2011

Federal Headlines

IRS Provides Stock Issuers with Transition Relief from Broker Basis Reporting Rules (Notice 2011-18)


The IRS has provided transition relief for corporations that must report any organizational action (such as a stock split, merger or acquisition) occurring in 2011 that affects the basis of their stock. The IRS will not assert penalties under Code Sec. 6721 for failure to timely file an issuer return with the IRS, as required by Code Sec. 6045B(a), before the transitional deadline of January 17, 2012.


The IRS expects issuers to make a good-faith effort to comply with the requirements of Code Sec. 6045B(a); however, until an alternative form is developed and made available, issuer compliance may be currently satisfied only through public reporting of information. Accordingly, the IRS will not impose Code Sec. 6721 penalties for a failure to file an issuer return within 45 days of an organizational action taken in 2011, provided that the issuer files the issuer return with the IRS or posts the return on its website by January 17, 2012. This transitional relief does not apply to issuers of stock in regulated investment companies, which are not subject to the issuer reporting requirements for 2011.

Notice 2011-18, 2011FED 46,277

Other References:


Code Sec. 6045B


CCH Reference - 2011FED 35,936.01


Code Sec. 6721


CCH Reference - 2011FED 40,220.75


Tax Research Consultant


CCH Reference - TRC SALES: 6,068


Guidance Clarifying Termination Rules for Tax-Sheltered Annuity Contracts Provided (Rev. Rul. 2011-7)


The IRS has provided guidance clarifying how the plan termination provisions apply to tax-sheltered annuity contracts. Under final regulations published in 2007, a Code Sec. 403(b) plan is permitted to contain provisions that provide for plan termination and that allow accumulated benefits to be distributed on termination. The guidance clarifies through four examples whether a plan has been terminated under Reg. 1.403(b)-10(a) and whether distributions made to participants or beneficiaries in connection with the termination of the plan are included in gross income.


Plan termination and the distribution of accumulated benefits is permitted only if the employer does not make contributions to any Code Sec. 403(b) contract that is not part of the plan. A Code Sec. 403(b) plan is considered terminated under Reg. 1.403(b)-10(a) only after all accumulated benefits under the plan are distributed to participants and beneficiaries. The distributions must take place as soon as administratively practicable after termination of the plan. For this purpose, delivery of a fully paid individual insurance annuity contract is treated as a distribution.


Moreover, as long as the contract maintains its status as a Code Sec. 403(b) contract, the value of: (1) a fully paid individual annuity contract, or (2) an individual certificate evidencing fully paid benefits under a group annuity contract is not included in gross income until amounts are actually paid to the participant or beneficiary out of the contract. Any other distributions to a participant or beneficiary to effectuate plan termination are included in gross income, except to the extent the amount is rolled over to an IRA or other eligible retirement plan by a direct rollover or by a transfer made within 60 days after the distribution.

Rev. Rul. 2011-7, 2011FED 46,278

Other References:


Code Sec. 403


CCH Reference - 2011FED 18,282.01


CCH Reference - 2011FED 18,282.0403


Tax Research Consultant


CCH Reference - TRC RETIRE: 69,054


CCH Reference - TRC RETIRE: 69,060


State Headlines

Alabama --Sales and Use Tax: U.S. Supreme Court Holds 4-R Act Challenges May Be Based on Exemptions


The U.S. Supreme Court has held that a railroad may, under the federal Railroad Revitalization and Regulatory Reform Act (4-R Act), challenge Alabama sales and use taxes that apply to rail carriers' purchases of diesel fuel, but exempt fuel purchases by rail competitors. Although Congress prohibited 4-R Act challenges based on property tax exemptions for non-railroad property, it did not prohibit challenges based on non-property tax exemptions. While the logic for this distinction "eludes" the Court, it is bound by the statute that Congress wrote. The Court remanded the case to the trial court to determine if Alabama actually had discriminated against the railroad as alleged, or whether it can offer a sufficient justification for declining to provide the exemption at issue to rail carriers.



Railroads pay Alabama sales and use tax on their purchase and use of diesel fuel. However, purchases of diesel fuel by interstate motor and water carriers are exempt from the tax, although motor carriers are subject to motor fuel excise and gasoline taxes. The railroad here challenged this taxing regime in federal court as a violation of the 4-R Act's prohibition on discrimination in taxation against rail carriers. The U.S. Court of Appeals for the Eleventh Circuit affirmed the district court's dismissal of the challenge, based on its prior decision in Norfolk Southern Railway Co. v. Alabama Department of Revenue, 550 F.3d 1306 (11th Cir. 2008), which raised identical issues. In Norfolk Southern, the Court of Appeals held that the 4-R Act does not prevent a state from exempting other commercial entities from a generally applicable tax and leaving the tax on railroads in place, so long as the railroad is not targeted. The court relied on the decision in Oregon Department of Revenue v. ACF Industries, Inc., 510 U.S. 332 (1994), in which the U.S. Supreme Court held that a railroad could not challenge a generally applicable property tax on the basis that certain non-railroad property was exempt from the tax.


The U.S. Supreme Court accepted the railroad's request for review, and reversed the Court of Appeals.

High Court Opinion


Writing for the majority, Justice Elena Kagan held that the 4-R Act's prohibition on discriminatory taxes extends to sales and use taxes, and that prohibited discrimination can result from exempting competitors from a tax. The Act bars four forms of discriminatory taxation under the four subsections of 11501(b). The first three subsections, (b)(1)-(3), prohibit a state from imposing higher property tax rates or assessment ratios on railroads' property than on other commercial and industrial property. "Commercial and industrial property" includes only "property . . . subject to a property tax levy." The fourth subsection, (b)(4), is a catchall provision that prohibits "another tax that discriminates against a rail carrier."


The Court held that "another tax," as used in subsection (b)(4), refers to any tax a state might impose, except the taxes on property previously addressed in subsections (b)(1)-(3). It does not, as Alabama argued, apply only to gross receipts taxes that some states imposed in lieu of property taxes at the time of the 4-R Act's passage.


Furthermore, a state excise tax (such as Alabama's sales and use tax) that applies to railroads but exempts their competitors, whether the latter are interstate or local actors, is subject to challenge under subsection (b)(4) as a discriminatory tax. The Court's decision in ACF Industries was based on its conclusion that Congress intended to insulate property tax exemptions from challenge when it excluded property not "subject to a property tax levy" from the definition of "other commercial and industrial property" against which the taxation of railroads is measured under subsections (b)(1)-(3). However, Congress expressed no intent to insulate non-property tax exemptions like those at issue in this case from the Act's prohibition on discriminatory taxation. Subsection (b)(4) is drafted more broadly than the preceding subsections and does not contain their limitations.


Alabama argued that this result creates troubling inconsistencies, and that distinguishing between property tax exemptions and other tax exemptions is illogical. The Court did not disagree, and said that it was unaware of a satisfying reason for the distinction. However, the Court is bound by the language of the statute as it was drafted by Congress.



In dissent, Justice Clarence Thomas, joined by Justice Ruth Bader Ginsburg, would hold that, based on the structure and background of the 4-R Act, a tax exemption scheme must target or single out railroads by comparison to general commercial and industrial taxpayers in order to violate the Act. Under this test, the railroad's complaint was properly dismissed because it did not allege that Alabama's sales and use taxes targeted railroads compared to most taxpayers. Failure to define the appropriate comparison class and the type of differential treatment required to constitute discrimination will force states to give railroads every tax exemption that anyone else gets, or engage in open-ended litigation over what is sufficient justification for such distinctions. The dissenters do not understand the majority opinion as foreclosing the lower courts from utilizing the test the dissent proposes.

CSX Transportation, Inc. v. Alabama Department of Revenue, U.S. Supreme Court, Dkt. 09-520, February 22, 2011, 201-537


Other References:


Explanations at 60-740


Kansas --Sales and Use Tax: Agricultural Transactions, Oil and Fuel Sales, Exemption Certificates Discussed


A private letter ruling issued by the Kansas Department of Revenue examines the application of retailers' sales tax to agricultural transactions and sales of oil and dyed diesel fuel and discusses the use of exemption certificates.

Exempt Agricultural Transactions


The agricultural exemption certificate would not apply to a sale of oil to an excavating company performing agricultural excavation work if the oil were not for use in agricultural equipment engaged in the production of agricultural commodities. Examples of such agricultural equipment include tractors, combines, and harvesters. In addition, the agricultural exemption applies only to purchases by a person or entity actually engaged in the production of agricultural commodities, such as farmers, ranchers, or feedlots.


To claim the agricultural exemption provided for farm machinery and equipment, the purchaser must be engaged in farming or ranching and the machinery or equipment must only be used in farming or ranching. Exempt machinery and equipment generally is all machinery and equipment that is ordinary and necessary for the growing or raising of agricultural products. Examples of machinery or equipment that does not qualify for an agricultural exemption are pickup trucks, all-terrain vehicles (ATVs), lawnmowers, bulldozers, fencing materials, and hand tools such as shovels.

Fuel and Oil Sales


Generally, when motor fuel is purchased in bulk and its taxable or nontaxable use can only be determined once the fuel is actually consumed, the purchase should be made without retailers' sales tax. Oil should be taxed even when sold in bulk, unless the purchaser provides a properly completed exemption certificate.

Exemption Certificates, Generally


An exemption certificate relieves a seller from collecting sales tax from a purchaser, provided that the certificate is accepted in good faith and without fraudulent intent to avoid collecting sales tax. General requirements for accepting an exemption certificate in good faith include a seller verifying the identity of the person or entity presenting the exemption certificate and the seller maintaining the completed certificate as part of its sales tax records for at least three years. If, however, the customer or the purchase does not meet the exemption criteria or fit the examples listed on the certificate, the sale probably is not exempt. Sellers making recurring sales to the same customer do not need to obtain an exemption certificate for each transaction but need to obtain a new certificate if there are no transactions for a 12-month period.


Subscribers can view the letter ruling.



Private Letter Ruling No. P-2011-001, Kansas Department of Revenue, February 16, 2011


New Jersey --Multiple Taxes: Governor's Budget Package Proposes Tax Relief


New Jersey Gov. Chris Christie has revealed his Fiscal Year 2012 Budget, which contains proposed tax relief for taxpayers who are subject to the corporation business tax (CBT), gross (personal) income tax, property tax, sales and use tax, utilities tax, and estate tax. The governor is proposing to provide $200 million in job-creating tax cuts and business incentives.

CBT Tax Relief


Gov. Christie proposes several methods of relieving the tax liability of corporations. Among these are:


-- a three-year phase-in of a single sales factor apportionment formula;


-- a 25% reduction in the S corporation minimum tax;


-- an exemption for currently nonexempt agricultural cooperatives; and


-- an increase in the research and development credit to 100%.

Other Proposed Tax Relief


Included in Gov. Christie's other tax relief proposals are:


-- 50% business income/loss netting and loss carryforward relief for personal income tax taxpayers;


-- a sales and use tax exemption for installation and support of electronically delivered business software;


-- an increased property tax homestead exemption;


-- three-year phaseout of the transitional energy facility assessment (TEFA) imposed on utilities; and


-- an increase in the estate tax exemption from $675,000 to $1 million.

The Governor's FY 2012 Budget and Remarks of Governor Chris Christie Regarding the Fiscal Year 2012 Budget, Office of New Jersey Gov. Chris Christie, February 22, 2011


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