Tax Newsletter - 2007

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October 21, 2008


Federal Headlines

Bernanke Says Fiscal Stimulus Package "Appropriate" for Consideration Federal Reserve Chairman Ben S. Bernanke said it is "appropriate" for Congress to be considering a fiscal stimulus program at this time, given the risk of a protracted economic slowdown. Bernanke said the size of the program should be "significant," but declined to suggest a specific dollar amount. At a hearing of the House Budget Committee on October 20 Bernanke said any fiscal package should be structured so that its peak effects on aggregate spending and economic activity are "felt when they are most needed, namely, during the period in which economic activity would otherwise be expected to be weak." Bernanke added that any fiscal package should be "well-targeted" in order to maximize the beneficial effects on spending and activity per dollar of increased federal spending or lost revenue. Meanwhile, Congress must be vigilant in ensuring that any allocated funds are used effectively and responsibly, and any program should be designed to limit longer term effects on the government's structural budget deficit, Bernanke said. The Fed chairman also noted that, ideally, a fiscal package would not only boost overall spending and economic activity but would also redress specific factors that have the potential to extend or deepen the economic slowdown. If Congress proceeds with a fiscal package, Bernanke noted, it needs to include measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers. "Such actions might be particularly effective at promoting economic growth and job creation," he said. White House Meanwhile, White House Press Secretary Dana Perino said that the administration is "open to ideas" about an economic stimulus plan and is continuing to have discussions with members of Congress on the matter. Perino, at an October 20 press briefing, cautioned that several of the programs under consideration in Congress "are coming in the cloak of being stimulative," but would not jumpstart the U.S. economy. "It's clear that the things they've been suggesting so far wouldn't be stimulus in the short-term," said White House Deputy Press Secretary Tony Fratto. The administration intends to consult with the Fed chairman to make sure that "any elements of a program would actually stimulate the economy and meet that test," Perino noted. Council of Economic Advisers Chairman Edward Lazear, in an interview on CNN's "Late Edition" on October 19, noted that some congressional proposals, such as building roads and bridges, might be good policy but will not turn the economy around in the short run. "That's something that Congress has to decide," Lazear added. The administration believes infrastructure projects are "simply too slow," he noted. The White House also objects to focusing on "one particular industry" to spur economic growth, Lazear pointed out. The CEA chairman said the White House will use the following criteria to determine if an economic measure meets the administration's stimulus test: "Is it going to be effective? Is it going to move the economy in the right direction? And is it going to do it soon enough?" Recession Lazear, in the CNN interview, was the first administration official to use the word "recession" in describing current economic conditions in some areas of the United States. Pointing to portions of the country where the unemployment rate exceeds six percent, Lazear said, "I think anyone would characterize (that) as a recession." The White House has supported extending unemployment compensation to those living in states with at least a six-percent jobless rate. Perino has indicated that the White House is open to continuing unemployment benefits in high unemployment states although its preference is to help people find jobs. Asked about Lazear's remarks regarding a U.S. recession, the White House spokeswoman said, "I think he was just talking about reality, and that there are some regions of the country that are hurting more than others, and our focus has to be on trying to help them." By Sarah Borchersen-Keto and Paula Cruickshank, CCH News Staff Final Regulations Modify and Clarify Standards for Treating PILOTs as Generally Applicable Taxes (T.D. 9429) Final regulations have been issued that modify and clarify the standards for treating certain payments in lieu of taxes or other tax equivalency payments (PILOTs) as generally applicable taxes for purposes of the private security or payment test under Code Sec. 141. Final regulations under Code Sec. 141 providing comprehensive guidance on most aspects of the private activity bond restrictions were published on January 16, 1997. On October 19, 2006, a notice of proposed rulemaking regarding the standards for treating PILOTs as generally applicable taxes for purposes of the private security or payment test under Code Sec. 141 was published. These final regulations adopt the proposed regulations, with revisions. Background Interest on a private activity bond, other than a qualified bond under Code Sec. 141(e), is not excludible from gross income. Code Sec. 141(a) classifies a bond as a private activity bond if it is part of an issue that meets both the private business use test under Code Sec. 141(b)(1) (private business use test) and the private security or payment test under Code Sec. 141(b)(2) (private payment test). In addition, Code Sec. 141(a) independently treats a bond as a private activity bond if it is part of an issue that meets the private loan test under Code Sec. 141(c). Reg. §1.141-4(e)(1) provides that for purposes of the private security or payment test, generally applicable taxes are not taken into account. In other words, they are not payments from a nongovernmental person and are not payments in respect of property used for a private business use. Generally, the purpose of this generally applicable taxes exception is to allow eligible tax payments made with respect to property or services to be used to pay debt service on an issue without causing private payments. Final Regulations The final regulations modify the standards for treating PILOTs as generally applicable taxes for purposes of the private security or private payment test under Code Sec. 141, to provide guidance on whether PILOTs are eligible to be treated as generally applicable taxes for this purpose. Among other things, they clarify and illustrate the scope of the special charge limitation on generally applicable taxes. In addition, they remove the example in the last sentence of Reg. 1.141-4(e)(5)(ii) of the 1997 regulations. The final regulations generally continue the approach to the commensurate standard because they continue to believe that this approach will better ensure a reasonably close relationship between eligible PILOTs and generally applicable taxes. The Treasury Department and the IRS declined to adopt a suggestion to allow fixed-payment PILOTs. The regulations also refine the commensurate standard in certain technical respects. Broader flexibility for phased for phased adjustments to PILOTs during development, construction, or initial start-up period of the property is allowed. Also, the regulations do not prohibit any use of PILOTs to pay debt service on an issue, although they provide that a PILOT is not commensurate with a generally applicable tax if the PILOT is set at a fixed dollar amount that cannot vary with changes in the level of the generally applicable tax on which it is based. With respect to the use of "public purpose" and "governmental purpose," the regulations adopt consistent terminology in order to clarify the intended uniform standard for the use of generally applicable taxes and eligible PILOTs. Also, the regulations require use of an eligible PILOT for governmental or public purposes for which the underlying generally applicable tax on which it is based may be used. The regulations are effective October 24, 2008, and generally apply to bonds sold on or after October 24, 2008. They also provide a transitional rule for refundings and a transitional rule for certain bonds for certain projects substantially in progress. T.D. 9429, 2008FED ¶47,062 Other References: Code Sec. 141 CCH Reference - 2008FED ¶7702B CCH Reference - 2008FED ¶7702F CCH Reference - 2008FED ¶7702R Tax Research Consultant CCH Reference - TRC SALES: 51,104 IRS Barred by Expired Limitations Period from Reversing Erroneous Credit of Overpaid Income Tax to Estate Tax Liability (Rosen, TC) The IRS was barred by the statute of limitations for assessment from recharacterizing an amount it mistakenly credited toward a decedent's estate tax liability that was initially tendered by the decedent's estate to cover the income tax liability shown on the decedent's final return. Initially, the decedent's estate filed an income tax return. The IRS mistakenly assessed only part of the liability properly reported on the return and refunded the remainder. The estate voided the refund check and returned it to the IRS with an explanation that the refund was made in error. Nevertheless, the IRS recorded the refund as an overpayment of the income tax liability and subsequently applied the supposed overpayment to the decedent's estate tax liability. Following expiration of the three-year period for assessing tax with respect to the income tax liability, the IRS determined that the refund was made in error and attempted to apply it to the decedent's income tax liability. However, because the limitations period had expired this action was improper and the payment was treated as a credit of the estate tax liability. The decedent's estate tax refund was, therefore, calculated by treating the credited amount as a payment of estate tax liability. L. Rosen Est., 127 TC No. 8, Dec. 57,556 Other References: Code Sec. 6402 CCH Reference - 2008FED ¶38,519.55 Code Sec. 6501 CCH Reference - 2008FED ¶38,963.31 Code Sec. 6512 CCH Reference - 2008FED ¶39,100.38 CCH Reference - FINH ¶21,540.60 Tax Research Consultant CCH Reference - TRC IRS: 30,052 CCH Reference - TRC IRS: 33,312.05
State Headlines

Minnesota --Personal Income Tax: Nonresident Income From Wages for Work Performed in Minnesota Addressed The Minnesota Department of Revenue has issued a personal income tax withholding revenue notice regarding the treatment of a nonresident's income from wages for work performed in Minnesota. As a result of a law change that passed during the 2008 legislative session, the Department has taken the following positions on the treatment of certain deferred income from wages: Severance pay: If an employer pays a nonresident with severance pay, the resulting income from wages is assigned to Minnesota to the extent that work connected with the employment from which the payment is received was performed in Minnesota. Equity based awards: If an employer pays a nonresident with an equity based award, including non-statutory stock options, stock appreciation rights, or restricted stock, the resulting income from wages is assigned to Minnesota in the ratio of days worked in Minnesota during the "allocation period" to the total number of days worked during the "allocation period." Other non-statutory deferred compensation: If an employer pays a nonresident with other non-statutory deferred compensation, the resulting income from wages is assigned to Minnesota in the ratio of days worked in Minnesota during the "allocation period" to the total number of days worked during the "allocation period." The allocation period is the period of time during which the employee accrued the right to the deferred compensation. The publication replaces and revokes Revenue Notice No. 01-10. Subscribers to CCH Tax Research NetWork can view the full text of the revenue notice. Revenue Notice No. 08-10, Individual Income Tax and Withholding - Wages of Nonresident Individuals Assigned to Minnesota for Work Performed in Minnesota, Minnesota Department of Revenue, October 13, 2008.

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