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October 28,  2008

Federal Headlines

Settlement Payments and Legal Fees Must Be Capitalized (Wellpoint, Inc., TCM)

 

Settlement payments made by a commercial health insurance provider to resolve lawsuits brought by three state attorneys general could not be deducted as ordinary and necessary business expenses but, instead, had to be capitalized under the origin of claim doctrine, the Tax Court has ruled. Legal and professional fees incurred to defend against the lawsuits also had to be capitalized.

 

The taxpayer had merged with several licensees of Blue Cross and Blue Shield, which at the time were required to be nonprofit organizations. The attorneys general in the three states where the mergers took place, brought lawsuits claiming that the licensees had a charitable purpose and received benefits under state and federal law because of that purpose. As a result of the mergers, however, the charitable purposes were no longer being met and, under charitable trust principles, the charitable assets that had accumulated by the licensees should be taken away from the taxpayer and redirected to the same or similar charitable purpose.

 

Thus, the court ruled that the origin of the litigation claims was a dispute over ownership of the alleged charitable assets. The settlement payments made by the taxpayer to resolve the claims, as well as the accompanying legal and professional fees, had to capitalized as an expense incurred to defend or perfect title to the property. The taxpayer's argument that it only settled to avoid interruption of its business or loss of goodwill was irrelevant with regard to determining whether the payments were deductible.

Wellpoint, Inc., TC Memo 2008-236, Dec. 57,563(M)

Other References:

 

Code Sec. 162

 

CCH Reference - 2008FED ¶8526.4162

 

Code Sec. 263

 

CCH Reference - 2008FED ¶13,709.85

 

Tax Research Consultant

 

CCH Reference - TRC BUSEXP: 9,402

CCH Reference - TRC BUSEXP: 12,306

 

Lock-in Letter Was Not a Collection Action (Davis, TCM)

 

A "lock-in letter" was not a collection action within the meaning of the Code Secs. 6320 and 6330. The letter was sent by the IRS to the taxpayer's employer and directed the employer to disregard the information on the taxpayer's Form W-4, Employee's Withholding Allowance Certificate, and instead withhold income tax as directed by the IRS. Further, the court lacked jurisdiction to enjoin under Code Sec. 6213(a) because the IRS did not assess a deficiency and was not attempting to collect anything for a deficiency that was arguably the subject of the instant action. Thus, the IRS did not issue a notice of determination and the Tax Court lacked the jurisdiction to enjoin.

K. Davis, TC Memo. 2008-238, Dec. 57,565(M)

Other References:

 

Code Sec. 6213

 

CCH Reference - 2008FED ¶37,549.45

 

Code Sec. 6320

 

CCH Reference - 2008FED ¶38,134.20

 

Code Sec. 6330

 

CCH Reference - 2008FED ¶38,184.105

 

Tax Research Consultant

 

CCH Reference - TRC IRS: 27,218

 

CCH Reference - TRC IRS: 51,056

State Headlines

Louisiana --Multiple Taxes: Wind and Solar Tax Credit Rules Adopted

 

For purposes of personal, corporate, and franchise income taxes, the Louisiana Department of Revenue has adopted a rule addressing state wind and solar tax credits. In order for costs associated with the purchase and installation of a wind or solar energy system to qualify for this credit, the expenditure must be made on or after January 1, 2008. The amount of the credit is equal to 50% of the first $25,000 of the cost of each wind or solar energy system.

 

Subscribers to the CCH Tax Research NetWork can view the rules.

LAC: 61:I.1907, October 2009 Louisiana Register, effective October 20, 2008.

 

Virginia --Corporate Income Tax: Subtraction for Nonbusiness Income, Alternative Method of Apportionment Disallowed

 

The taxpayer, an out-of-state multinational corporation with numerous subsidiaries, was not allowed a subtraction for nonbusiness income resulting from the gains of a sale of subsidiary stock to an unrelated third party on its Virginia corporate combined income tax return. The taxpayer, in concert with the unrelated third party, elected to treat the transaction as an asset sale under IRC Sec. 338(h)(10) and then subtracted the gain from the sale of stock as nonbusiness income. However, the Virginia Department of Taxation has held that if the seller, target, purchaser or any combination thereof are Virginia taxpayers, the IRC Sec. 338(h)(10) election actually made on a federal return will be recognized exactly as it is for federal purposes. To the extent that any gain or loss is deemed to be recognized for federal purposes by any party, it will be similarly recognized by the applicable entity for Virginia purposes. Because Virginia follows the federal treatment of the IRC Sec. 338(h)(10) election, the taxpayer's subsidiary is deemed to have sold its assets, and must recognize the gain.

 

The taxpayer's request for an alternative method of allocation and apportionment in regards to the gain was also rejected because the taxpayer's subsidiary sold its own assets and the gain was recognized in the subsidiary's separately computed Virginia taxable income. As such, the subsidiary had a unitary relationship with its operating assets (both tangible and intangible) and the gain was properly included in the subsidiary's apportionable income. Additionally, Virginia's treatment of the gain from the sale of the subsidiary was found to be fairly proportioned.

 

Finally, the taxpayer's return was adjusted to include Virginia net operating loss deductions (NOLDs), which were not carried forward to the taxable years at issue by the auditor. Although Virginia income tax laws do not address NOLDs, the starting point in computing Virginia taxable income is federal taxable income and as such, Virginia allows a NOLD to the extent that it is allowable in computing federal taxable income.

Ruling of Commissioner, P.D. 08-188, Virginia Department of Taxation, October 17, 2008, ¶204-910

 

Other References:

 

Explanations at ¶10-055

 

Explanations at ¶11-505
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