Tax Newsletter

December 28, 2007

Federal Headlines

Proposed Regulations on Cash Balance Defined Benefit Plans Released (NPRM REG-104946-07)

The IRS has released proposed regulations implementing the provisions of Code Sec. 411(a)(13) and (b)(5) relating to cash balance and other hybrid defined benefit plans. The provisions, which were enacted as part of the Pension Protection Act of 2006 (P.L. 109-280), include rules under which cash balance and pension equity plans will be deemed not to violate age discrimination requirements and impose limits on the calculation of hypothetical account balances in such plans. The proposed regulations generally incorporate and expand on the provisions of Notice 2007-6, I.R.B. 2007-3, 272.

The proposed regulations generally apply to defined benefit plans under which any or all of a participant's accrued benefit is based on the balance of a hypothetical account maintained for the participant or an accumulated percentage of the participant's final average compensation (applicable defined benefit plans). They describe a safe harbor protecting such plans from liability for age discrimination in the calculation of accumulated benefits. If each individual's accumulated benefits can never be less than that of a similarly situated, younger participant, the safe harbor is satisfied.

The proposals also would implement the requirement that participants whose benefits are affected by the conversion of a traditional defined benefit plan into such a plan must be provided a benefit equal to at least the sum of the benefit accrued through the date of the conversion and the benefits earned after the conversion, with no "wearaway" or other interaction between the amounts. In addition, they would implement the requirement that the rate at which interest is credited to participants' hypothetical accounts under such plans cannot exceed a market rate of interest.

The regulations are proposed to be effective for plan years beginning on or after January 1, 2009 (later for some collectively bargained plans). Plans may rely on the proposed regulations for earlier periods. Written or electronic public comments will be considered, and the IRS and the Treasury Department specifically request comments both on the clarity of the proposed regulations and on a number of specific issues, including some beyond the scope of these provisions.

Proposed Regulations, NPRM REG-104946-07, 2008FED ¶49,781

Other References:

Code Sec. 411

CCH Reference - 2007FED ¶19,064C

CCH Reference - 2007FED ¶19,066E

Tax Research Consultant

CCH Reference - TRC RETIRE: 39,058

IRS Announces Inflation-Adjusted Rates for Air Transportation Excise Taxes (IR-2007-208)

The IRS has announced 2008 inflation-adjusted tax rates for the airline ticket excise taxes. The Code Sec. 4261(b) excise tax on the amount paid for each domestic flight segment of taxable transportation increases to $3.50. The Code Sec. 4261(c) excise tax on amounts paid for international air travel beginning or ending in the United States is $15.40. For a domestic flight segment beginning or ending in Alaska or Hawaii, the Code Sec. 4261(c) tax on the use of international facilities applies to departures at the rate of $7.70.

These inflation adjustments were not included in Rev. Proc. 2007-66, I.R.B. 2007-45, 970, the ruling that generally provides the inflation-adjusted tax rates for 2008. This is because, under Code Sec. 4261(j)(1)(A)(ii), the airline ticket taxes --taxes that fund the Airport and Airway Trust Fund --were scheduled to expire after September 30, 2007. Several continuing resolutions extended the 2007 rates through December 21, 2007 (P.L. 110-92, P.L. 110-116 and P.L. 110-137). But 2008 inflation-adjusted figures were not necessary until the Consolidated Appropriations Act, 2008 (HR 2764) was signed by the president on December 26, 2007 (TAXDAY, 2007/12/27, W.2). The Department of Transportation Appropriations Act within the larger consolidated Act extends the airline ticket taxes to air transportation that begins or is paid for no later than February 29, 2008.

The airline ticket taxes are expected to be extended for a four-year period when Congress completes work on the FAA Reauthorization Bill of 2007 (HR 2881), which passed the House on September 20, 2007 (TAXDAY, 2007/09/21, C.1), and has been placed on the Senate's calendar.

The IRS says that Rev. Proc. 2007-66 will soon be modified to include the 2008 inflation adjustments pertaining to airline ticket taxes.

IR-2007-208, ETR ¶66,842

Other References:

Code Sec. 4261

CCH Reference - ETR ¶19,305.014

CCH Reference - ETR ¶19,305.02

CCH Reference - ETR ¶19,305.495

Tax Research Consultant

CCH Reference - TRC EXCISE: 9,102.05

CCH Reference - TRC EXCISE: 9,104.05

IRS Announces Effect of AMT Patch and Provides 2007 Filing Guidance (IR-2007-209)

In response to the December 26, 2007, signing of the alternative minimum tax patch legislation (AMT patch), the IRS has issued a series of announcements and reminders regarding the upcoming 2007 filing season.

Although the IRS expects the filing season to start on time, some 13.5 million taxpayers using AMT-related forms will have to wait until approximately February 11, 2008, to file. In particular, taxpayers filing any of the following forms (manually or electronically) must wait until February 11, 2008, to file:

--Form 8863, Education Credits.

--Form 5695, Residential Energy Credits.

--Form 1040A, Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.

--Form 8396, Mortgage Interest Credit.

--Form 8859, District of Columbia First-Time Homebuyer Credit.

Other AMT-related forms, including Form 6251, Alternative Minimum Tax - Individuals, will be processed beginning on January 14, 2008.

In addition, the IRS has provided the following related guidance:

--Taxpayers should update any personal return-preparation software for the AMT patch.

--Taxpayers with $54,000 or less in adjusted gross income can electronically file their returns for free.

--Tax packages from the IRS, which will begin arriving in the mail around New Year's Day, went to the printer in November before the AMT patch was enacted.

IR-2007-209, 2008FED ¶46,221

Other References:

Code Sec. 6011

CCH Reference - 2007FED ¶35,141.02

Tax Research Consultant

CCH Reference - TRC FILEIND: 30,000

No Abuse of Discretion Where Offer-In-Compromise Based on Doubt as to Liability Not Considered (Baltic, TC)

An IRS settlement officer did not abuse her discretion when she issued a notice of determination without considering a married couple's offer-in-compromise (OIC) that was based only on doubt as to liability. Because the taxpayers received a notice of deficiency and had an opportunity to challenge the underlying tax liability before the Collection Due Process (CDP) hearing, but failed to do so, Code Sec. 6330 barred them from challenging the amount of the liability at the CDP hearing. Therefore, the settlement officer properly refused to consider the taxpayers' OIC that was based on doubt as to liability since such the OIC was a prohibited challenge to the underlying tax liability. The settlement officer exercised discretion in a reasonable way by issuing a notice of determination that sustained the lien but postponed the collection by levy until other IRS employees considered the OIC and various late-filed returns of the taxpayers.

P.P. Baltic, 129 TC No. 19, Dec. 57,213

Other References:

Code Sec. 6330

CCH Reference - 2007FED ¶38,184.12

Tax Research Consultant

CCH Reference - TRC IRS: 51,056

State Headlines

Illinois --Sales and Use Tax: Adult Clubs Improperly Denied Amusement Tax Exemption

The exclusion of adult entertainment cabarets from the City of Chicago's and Cook County's amusement tax exemptions for small-venue live performances was a content-based regulation on speech that did not serve a compelling state interest and, therefore, violated the First Amendment of the U.S. Constitution.

Both the City and the County allowed an exemption from their respective amusement taxes for live performances that took place in a space with a maximum capacity of not more than 750 people (small-venue exemption), but excluded from the exemption performances conducted at adult entertainment cabarets.

Content-Based Discrimination

Language from the City's adult use ordinance and the County's zoning ordinance, which were incorporated into the small-venue exemptions, established that the adult entertainment cabaret exclusions, on their face, discriminated on the basis of content. Both ordinances defined an adult entertainment cabaret by the content of the expression featured at the establishment, e.g., topless dancing, stripping, and entertainers who displayed specified anatomical areas.

Consequently, one could not determine whether the adult entertainment cabaret exclusion applied to a particular small venue without considering the content of the small venue's featured speech or expressive conduct. The contention by the City and the County that their tax schemes were content neutral or served content-neutral goals was rejected.

Compelling State Interest

Because the differential tax on erotic dance was a content-based regulation on protected expression, it was presumptively invalid and could be upheld only if it was necessary to serve a compelling state interest. No compelling state interest was established that necessitated the content-based adult entertainment cabaret exclusions contained in the amusement tax schemes.

Although the City and the County had a legitimate interest in enhancing their reputations in the fine arts, this interest did not rise to the level of a compelling state interest that justified a content-based restriction on protected expression.

Subscribers to CCH Tax Research NetWork can view this opinion.

Pooh-Bah Enterprises, Inc., v. County of Cook, Illinois Appellate Court, First District, No. 1-05-2924, December 21, 2007.

Missouri --Corporate Income Tax: Affiliated Group May Elect to Use Single-Factor Apportionment Method

The members of a taxpayer's affiliated group may elect to use the Missouri single-factor method of apportionment to determine the portion of the affiliated group's Missouri taxable income that is derived from sources within Missouri for Missouri corporate income tax purposes. Furthermore, in determining the affiliated group's Missouri apportionment percentage, the receipts from any intercompany transactions between the one group member domiciled in Missouri and the taxpayer-owned Missouri-domiciled single member limited liability company (LLC) that acts as an administrator for each member of the group are properly included as wholly within Missouri because those intercompany transactions are conducted completely within Missouri.

The receipts arising from transactions between the LLC and the out-of-state group members are properly treated as partly within and partly without Missouri. Because the brains of the LLC's operations are located within Missouri, lending Missouri effort to all of the LLC's business transactions, none of the receipts from any intercompany transactions involving the LLC would be classified as wholly without Missouri. Amounts paid to a Missouri organization by the state of Missouri for the benefit of Missouri beneficiaries and for the provision of services to those beneficiaries wholly within Missouri are included as sales transacted wholly within Missouri, while amounts paid to a non-Missouri organization by a state other than Missouri for the benefit of non-Missouri beneficiaries and for the provision of services to those beneficiaries wholly outside Missouri are included as sales transacted wholly without Missouri.

Letter Ruling No. LR4124, Missouri Department of Revenue, October 5, 2007, ¶202-797

Other References:

Explanations at ¶11-520

New York --Corporate Income Tax: Refund Based on Loss From Sale of Subsidiary Incorrectly Denied

The New York Tax Appeals Tribunal has reversed an administrative law judge's (ALJ) determination that it was correct for the New York Division of Taxation to deny a corporate franchise tax refund claim that was based on a loss incurred in 1996 from the sale of a subsidiary included in the taxpayer's combined group.

The taxpayer had argued that the loss was attributable to a reduction in business capital, rather than subsidiary capital. Because the subsidiary was included in the combined group in both 1995 and 1996, the taxpayer concluded that the loss could be carried back to 1995, reducing entire net income and generating a refund for that year. However, the ALJ ruled that, under the applicable statute, entire net income generally did not include income, profits, or losses from subsidiary capital. This case involved an investment in a subsidiary, and accordingly the loss could not be included in the computation of the taxpayer's entire net income or in the computation of the combined entire net income on the amended 1995 combined report. The ALJ determined that, under the Division's regulations, the taxpayer's loss from the sale of the subsidiary had to be added back to the taxpayer's individual entire net income.

The Tax Appeal Tribunal determined that the ALJ misinterpreted the applicable statute and thus, reached an incorrect conclusion in denying the refund claim. As a result the Tribunal ruled that add-back of losses from subsidiary capital provided for in Tax Law §208.9(a) does not apply to the loss incurred by the taxpayer on its sale of stock.

Bausch & Lomb, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 819883, December 20, 2007, ¶405-934

Other References:

Explanations at ¶10-635