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October 1,  2008

Federal Headlines

IRS Addresses Loss Deductions Allowed to Banks After Ownership Change (Notice 2008-83)

 

For purposes of Code Sec. 382(h), any deduction properly allowed after an ownership change of a corporation that is a bank with respect to losses on loans or bad debts, including any deduction for a reasonable addition to a reserve for bad debts, shall not be treated as a built-in loss or a deduction attributable to periods before the change date. This guidance does not affect the application of any provision of the IRC except Code Sec. 382. Banks may rely on this guidance until further guidance is issued.

Notice 2008-83, 2008FED ¶46,596

Other References:

 

Code Sec. 382

 

CCH Reference - 2008FED ¶17,115.40

 

Tax Research Consultant

 

CCH Reference - TRC NOL: 33,250

Individual Failed to Timely File a Mark-to-Market Election; Extension of Time to File Election Not Granted (Acar, CA-9)

 

An individual was not entitled to use the mark-to-market accounting method for trading losses he incurred for the tax year at issue because he did not make a timely mark-to-market election and did not qualify for a time extension under Reg. §301.9100-3 to file the election. He did not file his statement of election on the due date for his tax return, but filed it three years later with his amended return.

 

His argument that he did not have a reasonable amount of time to file the election because of the short period of time between the date of issuance of Rev. Proc. 99-17, 1999-1 CB 503, and the due date for making the election was without merit. The individual could not have made a timely election, even if Rev. Proc. 99-17 had been issued earlier, because he admitted that he became aware of Code Sec. 475(f) almost three years after the due date for making the election.

 

Further, the individual was not granted an extension of time to file the election because he used hindsight in filing the late election and, therefore, did not act reasonably and in good faith. He was not permitted to take advantage of his subsequently acquired knowledge that he incurred trading losses and, several years later, elect retroactively the most advantageous accounting method.

 

Affirming a DC Calif. decision, 2006-2 USTC ¶50,529.

K.Z. Acar, CA-9, 2008-2 USTC ¶50,564

Other References:

 

Code Sec. 475

 

CCH Reference - 2008FED ¶22,268.20

 

CCH Reference - 2008FED ¶44,014B.10

 

Tax Research Consultant

 

CCH Reference - TRC SALES: 45,360

CCH Reference - TRC SALES: 45,360.10

CCH Reference - TRC SALES: 45,360.15

 

Case-by-Case Analysis Necessary to Determine Medical Residents' Qualification for Student Exemption from FICA Taxes (University of Chicago Hospitals, CA-7)

 

A non-profit teaching hospital was not precluded as a matter of law from claiming a refund of amounts paid under the Federal Insurance Contributions Act (FICA) on the grounds that the student exception applied to its medical residents. The government argued that the student exception does not apply to medical residents and that when Congress repealed the intern exception from FICA tax, it intended to make both interns and medical residents ineligible for the student exception. However, Code Sec. 3121(b)(10) does not categorically exclude medical residents from eligibility for the student exception. Instead, a case-by-case analysis is required to determine the character of an employer as a school, college or university, and its relationship to an employee claiming student status. A teaching hospital could be regarded as part of the university with which it is affiliated for purposes of the student exception, and medical school graduates participating in postgraduate medical residencies at such university hospitals could be regarded as students even though they already possess a medical degree. Moreover, the repeal of the intern exception is irrelevant to the determination of whether medical residents qualify for the student exception.

 

Affirming a DC Ill. decision, 2006-2 USTC ¶50,520.

University of Chicago Hospitals, CA-7, 2008-2 USTC ¶50,566

Other References:

 

Code Sec. 3401

 

CCH Reference - 2008FED ¶33,533.23

 

CCH Reference - 2008FED ¶33,538.558

 

Tax Research Consultant

 

CCH Reference - TRC PAYROLL: 3,122

State Headlines

Alabama --Franchise Tax: State High Court Upholds Refund of Unconstitutional Tax

 

The Alabama Supreme Court reversed a previously reported Court of Civil Appeals decision (TAXDAY, 2007/12/05, S.2) and held that a taxpayer claiming a refund of unconstitutional franchise taxes was entitled to summary judgment regarding the Department of Revenue's (DOR's) right to assert a reliance-hardship defense. Although the DOR asserted that it had relied on now overturned precedent and that granting a refund to the taxpayer and similarly situated foreign corporations would create an extreme hardship for the state, the DOR had abandoned its reliance on the overturned precedent before the taxpayer made its first franchise tax payment in 1999. Because the DOR could not satisfy the reliance portion of the reliance-hardship defense, the defense was inapplicable to the taxpayer's franchise tax refund claim as a matter of law.

 

In addition, the Supreme Court affirmed the decision of the Court of Civil Appeals that reversed a summary judgment for the DOR denying the taxpayer a refund because it failed to identify a specific domestic competitor and thereby failed to prove that it had suffered any injury. Because the U.S. Supreme Court held in South Central Bell Telephone Co. v. Alabama, 526 U.S. 160 (1999) that, under the Commerce Clause, Alabama's former franchise tax scheme was unconstitutionally discriminatory against foreign corporations, the taxpayer was discriminated against as a matter of law. The Supreme Court also determined that, underMcKesson Corp. v. Division of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990), the taxpayer was not required to name specific domestic entities that mirrored it in corporate structure and operation.

 

Because numerous other legal and factual issues were raised, including the question of the amount of franchise taxes the taxpayer actually would have paid in 1999 had it been assessed as a domestic corporation, that have not been addressed by any court, the case was remanded to the Court of Civil Appeals for remand to the trial court for further proceedings consistent with the Supreme Court's decision.

Ex Parte Surtees (In re: Vulcan Lands, Inc. v. Surtees)., Alabama Supreme Court, No. 1070386, 1070399 , September 26, 2008, ¶201-330

 

Other References:

 

Explanations at ¶5-101

California --Property Tax: U.S. Supreme Court Asked to Review Tax Sale Notice Challenge

 

A property owner has asked the U.S. Supreme Court whether the application of a California statute that makes property tax sales conclusively valid violated the owner's due process rights in the circumstances of the sale of the owner's property. The California Court of Appeal rejected the owner's objections to the method by which notice of the sale was given and held that the methods were not unreasonable. (TAXDAY, 2008/04/04, S.7) The California Supreme Court refused to review the matter.

 

The same property owner has a separate petition arising from the same transaction and raising issues already pending with the U.S. Supreme Court. (TAXDAY, 2008/06/06, S.5)

 

Subscribers to CCH Tax Research NetWork can view the new petition.

Indyway Investment v. Cooper, U.S. Supreme Court, Dkt. 08-392, petition for certiorari filed September 22, 2008.

 

California --Sales and Use, Motor Fuel Taxes: Voluntary Use Tax Reporting Program Reinstated

 

Legislation is enacted that makes several changes regarding the administration of the California sales and use tax law, the motor vehicle fuel tax law, and the diesel fuel tax law. The bill:

 

-- authorizes the Department of Industrial Relations (DIR) to share information it collects as part of its normal investigative and enforcement efforts with the California State Board of Equalization (SBE);

 

-- reinstates the voluntary use tax reporting program;

 

-- deletes the January 1, 2009, sunset date of the Managed Audit Program; and

 

-- makes a number of changes regarding train operators who transport fuel products.

 
Information Sharing

 

When requested by the SBE and in order to assist the SBE in determining compliance with the sales and use tax law, the DIR may permit any duly authorized representative of that agency to transmit to the SBE information available in the DIR's records that indicates a retail establishment is operating without a seller's permit. According to the SBE, the purpose of this provision is to specifically authorize the information sharing to enhance the SBE's ability to ensure business entities possess a valid seller's permit and aid in the SBE's annual audit selection process.

 
Voluntary Use Tax Reporting Program

 

A deficiency determination mailed to a qualifying purchaser is limited to the three-year period beginning after the last day of the calendar month following the quarterly period for which the amount is proposed to be determined. This reduces the period of time for which the SBE may issue a determination from eight years to three years when unregistered in-state purchasers, as defined, voluntarily report to the SBE purchases subject to use tax. This legislation reinstates the voluntary use tax reporting program that was in effect January 1, 2004, through January 1, 2008.

 

A "qualifying purchaser" is a person that (1) voluntarily files an individual use tax return for tangible personal property that is purchased from a retailer outside California for storage, use, or other consumption within California; and (2) meets all of the following conditions:

 

-- the purchaser resides or is located within California and has not previously registered with the SBE, filed an individual use tax return with the SBE, or reported an amount on his or her individual California income tax return;

 

-- the purchaser is not engaged in business in California as a retailer, as defined;

 

-- the purchaser has not been contacted by the SBE regarding failure to report the use tax imposed as specified; and

 

-- the SBE has made a determination that the purchaser's failure to file an individual use tax return or to otherwise report or pay the use tax imposed, as specified, was due to reasonable cause and was not caused by reason of negligence, intentional disregard of the law, or by an intent to evade taxes.

 

If the SBE makes a determination that the purchaser's failure to timely report or remit the taxes imposed, as specified, is due to reasonable cause or circumstances beyond the purchaser's control, the purchaser may be relieved of any penalties imposed. Moreover, this provision is inapplicable to purchases of vehicles, vessels, or aircraft, as specified.

 
Managed Audit Program

 

The Managed Audit Program, by which taxpayers can perform an audit of their own books and records with limited guidance from the SBE, is extended indefinitely. The provision that states that the Program sunsets on January 1, 2009, is repealed.

 
Train Operator Monthly Information Reports

 

Under the motor vehicle fuel tax law and the diesel fuel tax law, as applicable, the following changes are made regarding train operators:

 

-- the definition of "train operator" is expanded to include any person that owns, operates, or controls a train and is licensed as a railroad by a state or federal agency;

 

-- every train operator that transports motor vehicle fuel, alcohol, or aircraft jet fuel into, out of, or within California is required to obtain a license from the SBE; and

 

-- each train operator is required to prepare and file with the SBE a report that includes ceratin information regarding the amount, location, and date of delivery of specified fuel as well as any other information required by the SBE.

Ch. 306 (A.B. 3079), Laws 2008, effective January 1, 2009.

 

Texas --Property Tax: Taxation of Stored Natural Gas Held Unconstitutional

 

The assessment of property tax on natural gas stored at an underground Texas storage facility that was part of the interstate pipeline system violated the Commerce Clause because the gas was in interstate commerce.

 

Although the taxpayer did not own or operate the storage facility, the appraisal district sought to assess taxes on it for a portion of the natural gas stored in the district. The taxpayer was held to be the taxable owner of the gas, but it was shielded from ad valorem taxation by the Commerce Clause because the gas was placed in interstate commerce when control of the gas was handed over to a common carrier --namely, the operator of the interstate pipeline system. The storage of the gas at the Texas facility did not remove it from interstate commerce because storage was a necessary and integral function of its transportation within the pipeline system and industry regulations expressly defined natural gas transportation to include storage. Lastly, the stored natural gas failed to meet at least two elements of the four-prong test for taxation of interstate commerce under the Commerce Clause. The court reasoned that there was insufficient nexus between the taxpayer and the pipeline administrator's decision to store gas at the Texas facility, and the services provided by the state were addressed through taxation of the storage facility itself.

Peoples Gas, Light, and Coke Co. v. Harrison Central Appraisal District, Texas Court of Appeals, Sixth District, No. 06-07-00103-CV, September 24, 2008,

¶403-492

 

Other References:

 

Explanations at ¶20-065

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