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November 10,  2008

Federal Headlines

Regulations Limit Scope of 36-Month Rule Relating to Information Returns for Cancellation of Indebtedness by Certain Entities (T.D. 9430; NPRM REG-118327-08)

 

The IRS has issued final, temporary and proposed regulations relating to information returns for cancellation of indebtedness by certain entities. The temporary regulations are intended to avoid premature information reporting under Code Sec. 6050P by certain lenders that are presently required to file Form 1099-C, Cancellation of Debt. Specifically, the temporary regulations limit the scope of the 36-month rule of Reg. §1.6050P-1(b)(2)(iv) to cover only those "applicable financial entities," to which Code Sec. 6050P, as enacted in 1993, originally applied, prior to amendment in 1996. The text of the temporary regulations also serves as the text of the proposed regulations.

 

Code Sec. 6050P, which requires certain entities to file information returns and payee statements reporting discharges of indebtedness of at least $600, applies solely to "applicable financial entities." When that Code provision was enacted under the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), "applicable financial entities" included only financial institutions, credit unions and federal executive agencies. Final regulations adopted in 1996 required applicable financial entities to issue Forms 1099-C upon the occurrence of one of several "identifiable events," one of which was the expiration of a "nonpayment testing period." A rebuttable presumption was created that this testing period expired if a creditor had not received a payment for 36 months (the "36-month rule").

 

The Debt Collection Improvement Act of 1996 (P.L. 104-134) expanded Code Sec. 6050P to cover any executive, judicial or legislative agency, as well as any applicable financial entity. The Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170) further expanded the definition of "applicable financial entities" to include any organization "a significant trade or business of which is the lending of money."

 

After the IRS adopted final regulations in 2004 (T.D. 9160) that reflected the previous legislative changes to Code Sec. 6050P, commentators raised concerns that the application of the 36-month rule to entities with a significant trade or business of lending money might trigger a reporting requirement, even where the entity has not legally or practically discharged the debt. The IRS and the Treasury Department, in the preamble to the newly adopted regulations, stated its agreement with these concerns and determined that it was appropriate to limit the reach of the 36-month rule to those entities for which Code Sec. 6050P was originally intended. (The IRS noted that future guidance is being considered with respect to other concerns raised by commentators with respect to Code Sec. 6050P.)

 

As a result, the new temporary and final regulations limit the application of the 36-month rule to financial institutions, credit unions and federal executive agencies. Notwithstanding this limitation, the temporary regulations provide that, with respect to any entity previously subject to the 36-month rule that was required to file information returns in a tax year prior to 2008 on account of the 36-month rule, and that failed to so file, the date of discharge is the first identifiable event, if any, described in Reg. §1.6050P-1(b)(2)(i)(A) through (G), that occurs after 2007. Therefore, any entity previously subject to the 36-month rule that has never filed an information return remains subject to the information-reporting requirement upon the occurrence of any of the other identifiable events.

Proposed regulations

 

Written or electronic comments regarding the proposed regulations must be received by February 9, 2009. A public hearing on the proposed regulations is scheduled for March 13, 2009. Outlines of topics to be discussed at the hearing must be received by February 13, 2009.

T.D. 9430, 2008FED ¶47,064

Proposed Regulations, NPRM REG-118327-08, 2008FED ¶49,839

Other References:

 

Code Sec. 6050P

 

CCH Reference - 2008FED ¶36,310B

 

CCH Reference - 2008FED ¶36,311B

 

CCH Reference - 2008FED ¶36,311J

 

Tax Research Consultant

 

CCH Reference - TRC FILEBUS: 9,300

CCH Reference - TRC SALES: 12,452

 

Treasury Security Rate Set for Computing Current Plan Liability for November 2008 (Notice 2008-105)

 

For pension plan years beginning in November 2008, the IRS has released the corporate bond weighted average interest rate, the permissible range of interest rates used to calculate current plan liability and to determine the required contribution under Code Sec. 412(l) for plan years through 2008, and the current corporate bond yield curve and related segment rates for the purpose of establishing a plan's funding target under Code Sec . 430(h)(2).

 

The corporate bond weighted average interest rate for plan years beginning in November 2008 is 6.20 percent; and the 90-percent to 100-percent permissible range is 5.58 percent to 6.20 percent. The annual rate of interest on 30-year Treasury securities for October 2008, used to determine the minimum present value of a participant's benefit under Code Sec. 417(e)(1) and (2), is 4.17 percent.

 

For plans electing not to use the transitional rule under Code Sec. 430(h)(2)(G), or for plans whose first year begins after 2008, the 24-month average segments rates for November 2008 are: 5.17 for the first segment; 6.28 for the second segment; and 6.62 for the third segment.

 

For plan years beginning in 2008, the funding transitional segment rates for November 2008 are: 5.86 for the first segment; 6.23 for the second segment; and 6.34 for the third segment. For plan years beginning in 2009, the rates are: 5.51 for the first segment; 6.25 for the second segment; and 6.48 for the third segment.

 

For plan years beginning in 2008, the minimum present value transitional segment rates for November 2008 are: 4.81 for the first segment; 5.06 for the second segment; and 4.79 for the third segment. For plan years beginning in 2009, the rates are: 5.44 for the first segment; 5.95 for the second segment; and 5.41 for the third segment.

Notice 2008-105, 2008FED ¶46,645

Other References:

 

Code Sec. 401

 

CCH Reference - 2008FED ¶17,730.40

 

Code Sec. 412

 

CCH Reference - 2008FED ¶19,125.505

 

Code Sec. 417

 

 

 

Code Sec. 430

 

CCH Reference - 2008FED ¶20,161.30

 

Tax Research Consultant

 

CCH Reference - TRC RETIRE: 15,304.05

CCH Reference - TRC RETIRE: 15,304.10

CCH Reference - TRC RETIRE: 30,556

 

State Headlines

Massachusetts --Corporate Income Tax: Draft Combined Reporting Regulation Released

 

The Massachusetts Department of Revenue has issued a working draft of the combined reporting regulation, applicable to the state's corporate excise tax. The draft regulation provides definitions, unitary presumptions and inferences, corporations to be included in the combined report, water's edge and worldwide parameters, determination of taxable, apportionment of income, net operating loss carry forwards, credits, affiliated group election, and effective date information. Parties seeking to comment on the draft regulation should send an e-mail to RulesandRegs@dor.state.ma.us, no later than December 5, 2008.

 

Subscribers to CCH Tax Research NetWork can view the text of the draft regulation.

Working Draft of 830 CMR 63.32B.1, Massachusetts Department of Revenue, November 6, 2008.

 

New Jersey --Corporate Income Tax: State High Court to Review "Throwout "Rule

 

The New Jersey Supreme Court has agreed to review a previously reported Tax Court decision (TAXDAY, 2008/05/30, S.23) upholding as facially constitutional the corporation business tax "throwout "rule. Under the "throwout "rule, if a corporate taxpayer's total sales, both inside and outside New Jersey, include receipts assigned to a jurisdiction in which the taxpayer is not subject to tax on or measured by profits or income, or business presence or business activity, then the receipts are excluded from the denominator of the sales fraction for apportionment purposes. The Tax Court determined that the "throwout "rule did not violate the Due Process, Commerce, or Supremacy Clauses of the U.S. Constitution.

Pfizer, Inc. v. Division of Taxation,, New Jersey Supreme Court, Docket No. 63,147, October 30, 2008.

 

Wisconsin --Multiple Taxes: Related Entity Addbacks and Other Topics Discussed

 

The Wisconsin Department of Revenue has issued a bulletin that discusses a number of corporation franchise and income, personal income, and sales and use tax topics, including related entity addback provisions and use tax on motor vehicles. The bulletin also covers other matters that have been reported previously, such as the e-file mandate (TAXDAY, 2008/08/06, S.21), the discontinuation of TeleFile for individuals (TAXDAY, 2008/09/24, S.15), and the filing of wage statements and information returns (TAXDAY, 2008/10/20, S.16).

 

With respect to the related entity addback provisions, the bulletin contains the first part in a two-part series of frequently asked questions, with a focus on the following:

 

-- taxpayers subject to the addback requirement;

 

-- expenses subject to the addback requirement;

 

-- conditions necessary to deduct expenses that were added back; and

 

-- nondeductible related entity expenses.

 

The second part of the series will be issued in January 2009.

 

As for motor vehicles, the bulletin notes that a person or business that buys a motor vehicle from a non-dealer must report the purchase price when registering the vehicle with the state of Wisconsin and pay the use tax owed. The Department reviews 100% of the registrations for motor vehicles to determine if the buyer paid the correct amount of tax when the vehicle was registered. Approximately 20% of all vehicle registrations are selected for further audit.

 

The bulletin also discusses the treatment of customer charges for fuel and electricity used in manufacturing and announces the closure of the Department's offices in Baraboo, Lancaster, and Marinette.

Tax Bulletin No. 158, Wisconsin Department of Revenue, October 2008, ¶401-135

 

Other References:

 

Explanations at ¶10-620

 

Explanations at ¶60-570

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