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December 31, 2008

Federal Headlines

Corporation's Sales of Stock in Subsidiaries Terminated Its Interest; Taxed as Distributions in Exchange for Stock, Not Dividends (Merrill Lynch & Co., Inc., TC)

 

A corporation's cross-chain sales of stock in its subsidiaries to brother-sister corporations within the affiliated group qualified as redemptions in complete termination of the corporation's interest in the subsidiaries and were properly taxed as distributions in exchange for stock, rather than as dividends. In an opinion supplementing Merrill Lynch & Co., Inc. & Subs. (Dec. 55,017, 120 TC 12, affirmed in part and remanded from the U.S. Court of Appeals for the Second Circuit (2005-1 USTC ¶50,243, 386 F3d 464), the Tax Court determined that, since the corporation owned all of the subsidiaries's stock prior to the cross-chain sales, only its ownership interest in the subsidiaries had to be considered when applying the Code Sec. 302(b)(3) test for complete termination. The continuing constructive ownership interest of the affiliated group's parent in the subsidiaries through its ownership of the acquiring brother-sister corporations did not have to be considered in determining whether there had been a complete termination. Under Code Sec. 304(a), only the ownership interest of the person who actually receives property in exchange for the stock is considered, not that of a person who indirectly or constructively holds stock but neither transferred the stock nor received the proceeds of the stock sale.

 

Supplementing Tax Court decision Dec. 55,017, 120 TC 12, affirmed in part and remanded CA-2, 2005-1 USTC ¶50,243, 386 F3d 464.

Merrill Lynch & Co., Inc. & Subsidiaries, 131 TC No. 19, Dec. 57,635

Other References:

 

Code Sec. 301

 

CCH Reference - 2008FED ¶15,305.10

 

Code Sec. 302

 

CCH Reference - 2008FED ¶15,330.1394

 

CCH Reference - 2008FED ¶15,330.1628

 

Code Sec. 304

 

CCH Reference - 2008FED ¶15,378.22

 

Code Sec. 318

 

CCH Reference - 2008FED ¶15,906.42

 

Tax Research Consultant

 

CCH Reference - TRC CCORP: 21,202

 

CCH Reference - TRC CCORP: 24,058

 

CCH Reference - TRC CCORP: 24,202.05

 

Individual Not Entitled to Alimony Deduction; Payments Treated as Child Support (Haubrich, TCM)

 

An individual was not entitled to an alimony deduction for amounts paid to his ex-spouse pursuant to a divorce decree because he owed child support for the same period for which the deduction was claimed. Under Code Sec. 71, the individual's payments had to be allocated to child support and related obligations before any amount could be allocated to alimony. Since the taxpayer's total payments for the tax year at issue were less than the amount he owed for child support, child support arrears and medical reimbursement no portion of the amount paid could be allocated to alimony.

G.H. Haubrich, TC Memo. 2008-299, Dec. 57,636(M)

Other References:

 

Code Sec. 71

 

CCH Reference - 2008FED ¶6094.027

 

CCH Reference - 2008FED ¶6094.15

 

Code Sec. 215

 

Tax Research Consultant

 

CCH Reference - TRC INDIV: 21,450

 

State Headlines

Alabama --Corporate Income Tax: Use of Gross Income Ratio Formula to Apportion Interest Expense Deductions Upheld

 

A multistate corporation correctly apportioned interest expense deductions on its 1993 and 1994 Alabama corporate income tax returns using the gross income ratio formula. The specific language of the statute setting forth the gross income ratio formula for out-of-state corporations was valid and in effect for the tax years at issue and prevailed over the more general language of the regulations, which directed an out-of-state corporation to apportion its deductions to Alabama using the standard three-factor formula. The provisions of a statute will prevail in any case of a conflict between a statute and an agency regulation, and the Department of Revenue is not authorized to subvert a statute.

Alabama Department of Revenue v. Jim Beam Brands Co., Inc., Alabama Court of Civil Appeals, No. 2070768, December 19, 2008, ¶201-352

 

Other References:

 

Explanations at ¶11-520

New York --Corporate Income Tax: Computation of Bad Debt Reserve Balance Overturned

 

In a New York bank franchise tax case, a Tax Appeals Tribunal decision reversing an administrative law judge determination that had accepted the taxpayer's argument that the Division of Taxation incorrectly calculated the bad debt reserve account of the taxpayer's wholly owned subsidiary has been annulled.

 

According to the taxpayer, the Division's calculation caused the bad debt reserve account balances for succeeding years to be overstated, thus erroneously limiting the taxpayer's claimed bad debt deductions for the years at issue. The central question was whether the pre-1996 reserve account should have been annually increased by 32% (i.e., the total amount permitted as an expense for bad debts) or 40%. The 32% figure reflected the components of both Tax Law Sec. 1453(h)(1) and Tax Law Sec. 1453(h)(2), whereas the 40% figure was ascertained from the application of only Tax Law Sec. 1453(h)(2). The Tribunal held that the Division's calculation of 40% was correct. However, it was determined that it could not be said that the text of Tax Law Sec.1453 (former (h)(3)(C)) unambiguously prohibited an adjustment to entire net income under Tax Law Sec. 1453 (former (h)(1)) when computing the amount by which the bad debt reserve should be increased. The taxpayer successfully argued that the Legislature could not have intended that bad debt reserves be increased annually at higher levels than the annual bad debt deduction itself.

In the Matter of Emigrant Bancorp, Inc. v. Commissioner of Taxation and Finance, New York Court of Appeals, No. 10082, December 24, 2008, ¶406-262

 

Other References:

 

Explanations at ¶14-061
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