Tax Newsletter - 2009

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October 21, 2009


Federal Headlines

IRS Addressing Erroneous and Fraudulent Claims for First-Time Homebuyer Credit The IRS has paid out almost $10 billion in tax benefits to low- and middle-income Americans who claimed the first-time homebuyer tax credit. At the same time, it has been scrutinizing individual tax returns for errors and fraudulent claims. Congress enacted the credit in 2008 to spur the housing market. It extended the credit in 2009. For homes purchased in 2008 (after April 8, 2008), the credit in effect provides a $7,500 loan. Although the credit was refundable, it had to be repaid over a 15-year period. However, for homes purchased in 2009 (by November 30), Congress increased the credit to $8,000 and eliminated the repayment requirement. Thus, qualifying taxpayers with little or no tax liability could receive cash for the credit and not have to pay it back. The IRS reported in mid-September that 1.4 million taxpayers had claimed the credit, for a total of almost $10 billion. The Treasury Inspector General for Tax Administration (TIGTA) stated that, through May 29, 2009, it had identified more than 70,000 returns, claiming total credits of $489 million, by taxpayers who appeared to be ineligible for the credit. An IRS spokesman confirmed that, as of September 30, 2009, the Service has opened 107,000 civil tax cases involving the credit. The IRS Criminal Investigation (CI) Division has been scrutinizing tax credit claims through its questionable refund program. TIGTA, in a March 30, 2009, report, determined that CI had referred 273 cases to IRS auditors involving the credit. As of September 30, 2009, the IRS identified 167 criminal schemes involving the credit. Congressional Action House Majority Leader Steny H. Hoyer, D-Md., said he favors extending the first-time homebuyer's tax credit for one additional month, through December 31, 2009, for sales contracts entered into, but not yet settled. During that 30-day period, Hoyer said Congress should study the credit to determine its effectiveness as well as its ethical and honest usage, noting also that the real estate market and the home building industry are critical components of the U.S. economy. The House Ways and Means Oversight Subcommittee will hold a hearing October 22 on the IRS's administration of the credit. In a statement, subcommittee Chairman Rep. John Lewis (D-Ga.) said that he was pleased about the number of taxpayer claims for the credit but was concerned about reports of fraudulent schemes. The hearing will consider how the IRS can strike a balance between issuing refunds and protecting federal revenues. Senate Efforts A bipartisan effort to move a homebuyer tax credit in the Senate in the form of an amendment to a bill extending unemployment benefits has raised the ire of Democrats who have twice tried and failed to move the House-approved benefits bill (HR 3548) by unanimous consent. Both times the attempts were blocked by Sen. Johnny Issakson, R-Ga., who wants to attach his tax credit amendment to the unemployment benefits bill. Both Issakson and Sen. Christopher J. Dodd, R-Conn., have proposed extending the credit for an additional six months and expanding eligibility to all homebuyers, not just those purchasing their first home. The Issakson-Dodd proposal would also raise the qualifying annual income cap to $150,000 for individuals and $300,000 for couples. Democrats counter that the unemployment bill should be passed as soon as possible and not bogged down with debate over unrelated amendments. In addition, many balk at the length of the extension, the $16.7-billion cost of the proposal and expanding the tax break to all homebuyers. By Jeff Carlson, Stephen K. Cooper and Brant Goldwyn, CCH News Staff U.S. Citizens Residing in Canada Liable for AMT Based on Foreign Tax Credit Limitation (Jamieson, CA-DC) Married U.S. citizens residing in Canada were liable for the alternative minimum tax (AMT) because the amount of foreign tax credits they could claim was limited by Code Sec. 59(a)(2) (prior to repeal by the American Jobs Creation Act of 2004 (P.L. 108-357)) and was not offset by additional credits under the U.S.-Canada Convention With Respect to Taxes on Income and on Capital. Applying the last-in-time rule, the AMT foreign tax credit limitation under Code Sec. 59(a)(2) was the last expression of sovereign will and took precedence over the treaty, to the extent of any conflict between them. The couple's argument that the government could reconcile the treaty and the statute by allowing taxpayers to claim foreign tax credits after calculating the entire U.S. tax liability, including AMT, was rejected. This interpretation restricted the scope of Code Sec. 59(a)(2) to taxpayers who worked in a foreign country that did not have a treaty with the U.S. limiting double taxation. To the extent that there was any ambiguity as to whether Code Sec. 59(a)(2) applied to taxpayers in countries with which the Unites States has double taxation treaties, the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) clarified that Congress intended for Code Sec. 59(a)(2) to supersede existing treaty provisions prohibiting double taxation. Affirming the Tax Court, 95 TCM 1430, Dec. 57,425(M), TC Memo. 2008-118. W.D. Jamieson, CA-DC, 2009-2 USTC ¶50,689 Other References: Code Sec. 59 CCH Reference - 2009FED ¶5411.17 CCH Reference - 2009FED ¶26,865.013 CCH Reference - 2009FED ¶26,865.0518 Tax Research Consultant CCH Reference - TRC INTL: 18,060 CCH Reference - TRC FILEIND: 30,352 AICPA and Coalition of Tax, Consumer and Financial Groups Urge Ban on Tax Patents Lawmakers need to regain momentum to ban tax strategy patents, the American Institute of Certified Public Accountants (AICPA) and a coalition of tax, consumer and financial groups urged on October 20. Tax strategy patents may mislead taxpayers into believing that a patented strategy is valid under federal tax law simply because it is patented, the coalition cautioned in a letter to House taxwriters and other lawmakers. Patents The U.S. Patent and Trademark Office (PTO) has issued 82 tax strategy patents, Matthew Young, director of congressional and political affairs for the AICPA, told CCH. More than 130 applications are pending. The IRS plays no role in reviewing applications for tax strategy patents, Young explained. "The applications go solely to the PTO." Legislative Fix In the 110th Congress, the House voted to ban tax strategy patents as part of comprehensive patent reform legislation (HR 1908). However, patent reform legislation stalled in the Senate in 2008. Legislation (HR 2584) to ban tax strategy patents has been introduced in the current Congress. The bill would prohibit the PTO from issuing a patent for a tax planning method. The bill defines a tax planning method as a "plan, strategy, technique, or scheme designed to reduce, minimize, or defer, or has, when implemented, the effect of reducing, minimizing, or deferring, a taxpayer's tax liability." Tax preparation software is excluded from the definition of tax planning method in the bill. Other tools used solely to perform or model mathematical calculations or prepare tax or information returns are also excluded. Similar legislation has not been introduced in the Senate. "We expect (such legislation) soon," Young told CCH. Multiple Problems The problems associated with tax strategy patents are multiple and complex, the coalition told lawmakers. "Tax patents may limit the ability of taxpayers to utilize fully interpretations of tax law intended by Congress." Additionally, issuance of a patent is no guarantee that the underlying strategy is valid under the Tax Code, the coalition warned. By George L. Yaksick, Jr., CCH News Staff Legislation to Limit the Patentability of Tax Planning Methods, HR 2584 Letter to Lawmakers Regarding Tax Strategy Patent Legislation AICPA Media Advisory: Consumer and Taxpayer Rights Groups Seek Ban on Tax Patents
State Headlines

Georgia --Corporate, Personal Income Taxes: Captive Real Estate Investment Trust Rule Issued The Georgia Department of Revenue has issued a new corporate and personal income tax rule regarding the addback adjustment for certain captive real estate investment trust (REIT) expenses and costs. The department requires all direct and indirect captive REIT costs to be added back to income prior to claiming an exception to the addback adjustment. Any person that paid, accrued, or incurred such captive REIT costs must complete Form IT-REIT. A taxpayer seeking to request an alternative method of apportionment must file an application with the Commissioner at least 90 days prior to the due date of the Georgia return (including extensions) or at least 90 days prior to filing the return, whichever occurs first, for the tax year for which such application or use of an alternative method of apportionment is requested. A taxpayer seeking to claim an exception to the addback adjustment must attach a copy of Form IT-REIT containing certain specified information, and any applicable schedules to its tax return. Subscribers can view the rule. Reg. Sec. 560-7-3-.04, Georgia Department of Revenue, effective November 4, 2009 Ohio --Sales and Use Tax: Rule on Negative Equity in Vehicle Sales Is Adopted The Ohio Department of Taxation has adopted a regulation explaining the application of negative equity to the calculation of sales tax on the purchase or lease of a motor vehicle. "Negative equity" results when a motor vehicle purchaser trades in a vehicle with a current value that is less than the amount owed on the existing loan for that vehicle. For instance, when a dealer allows a $5,000 trade-in credit but the customer owes $7,000 on the existing loan, the negative equity is $2,000. If the dealer includes the negative equity in the total vehicle price on the retail buyer's agreement, it will be included in the base on which sales tax must be charged. If it is not included in the total vehicle price, the negative equity amount will not be included in the calculation of sales tax. The negative equity may be stated separately, for example, because the amount is owed to a third party. The regulation also includes examples of the calculation of sales tax on vehicle purchases where the customer trades in a vehicle with negative equity. Subscribers can view the regulation OAC 5703-9-36, Ohio Department of Taxation, effective October 25, 2009
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