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November 4,  2008

Federal Headlines

IRS Identifies New Transaction of Interest Involving Charitable Remainder Trusts (Notice 2008-99)

 

The IRS has identified a transaction involving charitable remainder trusts as a "transaction of interest" for purposes of the reportable transaction rules. In the transaction, a taxpayer creates a charitable remainder trust, designating a charity as the trust's remainder beneficiary. The taxpayer then contributes appreciated assets to the trust. The trust subsequently sells the appreciated assets and reinvests the proceeds of the sale in new assets such as money market funds or marketable securities. The taxpayer and the charity then sell or dispose of their respective interests in the trust to an unrelated third party for an amount equal to the value of the trust's assets. The trust then terminates, with its assets being distributed to the third party.

 

The taxpayer typically takes the position that the above set of transactions results in little or no taxable gain. The taxpayer takes a charitable deduction for the contribution to the charitable remainder trust. Gain on the sale of the contributed, appreciated assets by the trust is not subject to tax, because a charitable remainder trust is a tax-exempt entity under Code Sec. 664. When the trust purchases the new assets, it takes a cost basis in those assets. On the sale of the trust interests of the taxpayer and the charity to the third party, they take the position that they have sold their entire interest in the trust for purposes of Code Sec. 1001(e)(3), and that Code Sec. 1001(e)(1), which disregards basis with respect to the sale of a term interest, does not apply to the sale.

 

The taxpayer asserts that, for purposes of computing gain on the sale of the interests in the trust, the basis of those interests is the portion of the cost basis of the new assets allocable to those interests under the uniform basis rules of Reg. §§1.1014-5 and 1.1015-1(b), rather than the basis of the assets the taxpayer contributed to the trust. The basis in the new assets is higher than the taxpayer's basis in the appreciated assets contributed to the trust. The result of the taxpayer's claimed treatment of the transactions is that the gain on the sale of the appreciated assets contributed to the trust is never taxed, even though the taxpayer receives his or her share of the appreciated fair market value of those assets.

 

The IRS is concerned about the manipulation of the uniform basis rules to avoid tax on gain from the sale of the appreciated assets in this transaction. Specifically, it designates as a transaction of interest the coordinated sale or other coordinated disposition of the respective interests of the taxpayer (or other noncharitable recipient) and the charity in the trust, in circumstances similar to those described above, where the taxpayer takes the position that the transaction is described in Code Sec. 1001(e)(3). The IRS is particularly concerned about the taxpayer's claim to an increased basis in the interest in the trust together with the termination of the trust in a coordinated transaction to avoid tax from the sale of the appreciated assets.

Notice 2008-99, 2008FED ¶46,642

Other References:

 

Code Sec. 664

 

CCH Reference - 2008FED ¶24,468.12

 

Code Sec. 1001

 

CCH Reference - 2008FED ¶29,225.1011

 

Code Sec. 1014

 

CCH Reference - 2008FED ¶29,380.73

 

Code Sec. 1015

 

CCH Reference - 2008FED ¶29,394.14

 

Code Sec. 6011

 

CCH Reference - 2008FED ¶35,141.78

 

Code Sec. 6111

 

CCH Reference - 2008FED ¶37,002.157

 

Code Sec. 6112

 

CCH Reference - 2008FED ¶37,022.157

 

Tax Research Consultant

 

CCH Reference - TRC FILEBUS: 9,450.10

CCH Reference - TRC SALES: 6,102.20

 

IRS Fact Sheet Explains How to Avoid Incorrect Self-Employed Retirement Plan Deductions (FS-2008-24)

 

The IRS has released a fact sheet covering retirement plans established by self-employed business owners for themselves and their employees. In particular, the fact sheet explains how self-employed individuals can avoid IRS examinations and additional assessments by preventing incorrect deductions for contributions to retirement plans.

 

Sole proprietors can deduct contributions made to retirement plans for themselves. They can also deduct trustee fees if plan contributions do not cover them.

 

Employers who establish and maintain plans that comply with relevant Code requirements may currently deduct funds that are set aside for retirement. At the same time, the funds are not taxable to the employee until distributed from the plan. Such plans for the self-employed include Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) plans.

 

In order for a self-employed individual to deduct retirement plan contributions, he or she must have self-employment income. Self-employment income consists of net profits from Schedule C (Profit or Loss from Business, Sole Proprietorship) or Schedule F (Profit or Loss From Farming). The deduction is the total plan contributions that the individual can subtract from gross income on his/her federal income tax return. Limits apply to the deductible amount.

 

The self-employed plan deduction may not be allowable if:

 

--Form 1040, Schedule SE (Self-Employment Tax), Section A (if applicable), Line 4, or Section B (if applicable), Line 6, is less than the amount on Form 1040, Line 28.

 

--Form W-2 (Wage and Tax Statement) indicates an individual is a statutory employee and the amount in Box 1 is less than Form 1040, Line 28.

 

If a self-employed individual contributes to his/her own SEP-IRA, a special computation must be made to figure the individual's maximum deduction for these contributions. In this situation, compensation is the individual's net earnings from self-employment, which takes into account both: (1) the deduction for one-half of the individual's self-employment tax; and (2) the deduction for contributions to the individual's own SEP-IRA.

 

CCH Comment. A self-employed individual may use the rate table or worksheets in chapter 5 of IRS Publication 560, Retirement Plans for Small Business, for figuring the allowable contribution rate and tax deduction for SEP-IRA plan contributions.

 

If a SEP is maintained on a calendar year basis, yearly contributions are deducted on the self-employed individual's tax return for the year within which the calendar year ends. If a SEP is maintained, and the individual's tax return is filed, using a fiscal year or short tax year, contributions are deducted for a year on the individual's tax return for that year. For example, according to the IRS, if a fiscal-year taxpayer whose tax year ends June 30 maintains a SEP on a calendar-year basis, the individual deducts SEP contributions made for calendar year 2008 on his/her tax return for his/her tax year ending June 30, 2009.

 

The allowable deduction is reported on an individual's Form 1040, Line 28.

IRS Fact Sheet FS-2008-24, 2008FED ¶46,643

Other References:

 

Code Sec. 408

 

CCH Reference - 2008FED ¶18,922.0245

 

CCH Reference - 2008FED ¶18,922.0246

 

CCH Reference - 2008FED ¶18,922.0254

 

CCH Reference - 2008FED ¶18,922.40

 

Tax Research Consultant

 

CCH Reference - TRC PLANRET: 3,060.05

 

CCH Reference - TRC PLANRET: 9,060.05

Individual Entitled to Deduction for Rehabilitative Alimony (Bedwell, TCS)

 
Code Secs. 71 and 215

 

An individual was entitled to an alimony deduction for payments made to his former wife because he was not required to make the payments after her death under state (Tennessee) law. The payments made to her were alimony and were not part of a property settlement. State law contained a statutory preference for rehabilitative spousal support and transitional spousal support.

 

The couple's divorce decree contained a detailed division of the property of the parties and the decree provided for payments to the spouse over and above the property division. She was not in a position to support herself, the property provided for her in the decree was subject to debt, and she was accruing monthly expenditures. In addition, she had no means of support other than the nominal amounts she was earning, which fell far short of her obligations and incurred expenses.

 

Thus, the payments were designed to temporarily rehabilitate her financial situation and to give her time to become financially self-sufficient. Finally, it was highly unlikely the payments were part of a property division since they were not conditioned on the sale of any property. Back reference: 2008FED ¶6094.355.

M.W. Bedwell,

TC Summary Opinion 2008-139

 

Tax Research Consultant

 

CCH Reference - TRC INDIV: 21,150

CCH Reference - TRC INDIV: 21,200

 

Owners and Employee Were Responsible Persons Liable for Unpaid Payroll Taxes (Davis, Sr., DC La.)

 

The owners of three companies and their employee, a certified public accountant (CPA), serving as the vice president of finance for those companies, were all responsible persons for purposes of the trust fund recovery penalty. The owners were the founders, officers, board members and equal shareholders of each of the three companies. They had check-signing authority, could hire and fire employees, could exercise control over the companies' finances, including the payment of payroll taxes, and were intimately involved in running the companies. Although the CPA/employee had no check-signing authority, he supervised the accounting department, oversaw the preparation of checks, including payroll and federal tax deposit checks and had the authority to direct the accounting department to draft checks to the IRS instead of to other creditors.

 

Further, the individuals acted willfully when they made payments to other creditors despite knowing that the trust fund taxes remained unpaid. The owners' argument that they were not responsible persons was rejected because they were aware of the company's tax liabilities but displayed reckless disregard by failing to investigate and ensure that the CPA/employee was, in fact, handling the tax delinquencies. Moreover, they could not avoid liability by delegating responsibility for the payroll taxes to the CPA. In addition, the CPA knew that the owners continued to sign checks made payable to other creditors instead of the IRS, but he failed to correct the situation. Finally, the involuntary bankruptcy proceeding instituted for one of the companies did not strip the owners' of control and authority to pay that company's withholding tax obligations.

S.P. Davis, Sr., DC La., 2008-2 USTC ¶50,613

Other References:

 

Code Sec. 6672

 

CCH Reference - 2008FED ¶39,780.705

 

CCH Reference - 2008FED ¶39,780.78

 

CCH Reference - 2008FED ¶39,780.81

 

Tax Research Consultant

 

CCH Reference - TRC PAYROLL: 6,306.05

CCH Reference - TRC PAYROLL: 6,306.25

CCH Reference - TRC PAYROLL: 6,308.15

 

State Headlines

Indiana --Insurance, Corporate Income Taxes: Medicare Part D Sponsor Subject to Income Tax, Not Gross Premiums Tax

 

A wholly owned indirect subsidiary of a corporation that was a Tennessee domiciled insurance company formed exclusively to provide benefits as a prescription drug plan under the federal Medicare Part D program was not subject to the Indiana gross premiums tax because federal law prohibits states from taxing premiums paid on behalf of Part D plan enrollees or beneficiaries. The taxpayer was, however, subject to the corporate income tax.

 

State law established a gross premium privilege tax on insurance companies not organized under Indiana law. Federal law regarding Medicare Part D was later enacted, preempting state laws applicable to Medicare Part D plans offered by Part D plan sponsors. As a result, Indiana's gross premium privilege tax was prohibited on Medicare Part D plans. Thus, the taxpayer was not subject to the gross premiums tax since the taxpayer solely issues Medicare Part D plans, which are exempt from the tax.

 

Under federal law, Part D plan sponsors are not, however, exempt from taxes related to net income or profit realized by the organization from business conducted under Part D. Indiana only exempts insurance companies from adjusted gross income tax if the insurance company is subject the gross premiums tax. As discussed above, however, the taxpayer is not subject to the gross premiums tax and is therefore not exempt from Indiana adjusted gross income tax.

Revenue Ruling No. 2008-01 IT, Indiana Department of Revenue, September 12, 2008, ¶401-338

 

Other References:

 

Explanations at ¶88-110

 

Texas --Corporate Income Tax: Telephone Access and Operator Assistance Charges Taxable

 

A telephone company's (taxpayer) end user common line charges, special access charges, and operator assistance charges were Texas receipts for state franchise tax apportionment purposes under the former franchise tax because they constituted services performed in Texas.

 

The taxpayer argued that its access and operator assistance charges were not subject to apportionment as gross receipts from business done in Texas because the activities did not constitute services performed in Texas. The taxpayer also contended the charges were exempt from apportionment as Texas receipts because they constituted "receipts from interstate calls" or "revenues from calls in interstate commerce." Finally, the taxpayer asserted that apportioning its access and operator assistance charges as Texas receipts violated equal protection guarantees because it did not receive preferential tax treatment received by other companies.

 

The taxpayer's arguments were all dismissed as the court determined that the revenues in question were from services performed in Texas and represent gross receipts from business done in Texas. The court further noted that receipts from the sale of services must be apportioned to the location of the service. The court also determined that the taxpayer's access and operator assistance charges were not exempt from apportionment as gross receipts from business done in Texas because the taxpayer could not prove that its revenue from access charges was from interstate calls or calls in interstate commerce. Finally, the equal protection argument was denied because the taxpayer failed to prove that it was similar in nature to the types of companies receiving preferential tax treatment and thus it was not entitled to the same treatment.

Southwestern Bell Telephone Co. v. Combs, Texas Court of Appeals, Seventh District, No. 07-07-0172-CV, October 28, 2008, ¶403-497

 

Other References:

 

Explanations at ¶11-520

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