Tax Newsletter - 2009

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November 25, 2009


Federal Headlines

Proposed Regulations Address Awards of Administrative Costs and Attorney's Fees (NPRM REG-111833-99) Proposed regulations relating to awards of administrative costs and attorney's fees under Code Sec. 7430 have been issued. The proposed regulations reflect the amendments to Code Sec. 7430 made by the Taxpayer Relief Act of 1997 (P.L. 105-34) and the IRS Restructuring and Reform Act of 1998 (P.L. 105-206). CCH Comment. Code Sec. 7430 provides that a prevailing party in any administrative or court proceeding that is brought by or against the United States in connection with the determination, collection, or refund of any tax may be awarded a judgment or settlement for reasonable administrative or litigation costs incurred in connection with the proceeding. To recover attorney's fees and costs, an individual taxpayer cannot have a net worth in excess of $2 million at the time of the filing of the civil action. Pursuant to Code Sec. 7430(c)(4)(D)(ii), joint filers are treated as two separate individuals for purposes of computing the net worth limitation. Under the proposed regulations, net worth is calculated using the fair market value of assets to provide a more accurate assessment of a taxpayer's actual and current net worth as of the administrative proceeding date. The proposed regulations also specify which net worth and size limitations apply when a taxpayer is an owner of an unincorporated business, and clarify the net worth requirement in cases involving partnerships subject to the unified audit and litigation procedures of Code Secs. 6221 through 6234 (the TEFRA partnership procedures). The proposed regulations address the period for recovery of administrative costs, which generally entitles the taxpayer to recover costs incurred after a notice of proposed deficiency (a "30-day letter") is mailed to the taxpayer. They clarify that such costs are recoverable only if at least one issue (other than recovery of costs) remains in dispute. The proposed regulations also address procedural requirements with respect to presenting an application with the IRS or, upon receiving an adverse decision from the IRS with respect to such application, filing a petition with the Tax Court to recover administrative costs. Comments on the proposed regulations have been requested. A public hearing on the proposals is scheduled for March 10, 2010. Proposed Regulations, NPRM REG-111833-99, 2009FED ¶49,438 Proposed Regulations, NPRM REG-111833-99, FINH ¶41,144 Other References: Code Sec. 7430 CCH Reference - 2009FED ¶41,741C CCH Reference - 2009FED ¶41,742AC CCH Reference - 2009FED ¶41,742BC CCH Reference - 2009FED ¶41,742CC CCH Reference - 2009FED ¶41,742DC CCH Reference - 2009FED ¶41,742EC CCH Reference - 2009FED ¶41,742FC CCH Reference - 2009FED ¶41,742HC CCH Reference - FINH ¶22,392 CCH Reference - FINH ¶22,397 CCH Reference - FINH ¶22,405 CCH Reference - FINH ¶22,412 CCH Reference - FINH ¶22,417 CCH Reference - FINH ¶22,422 CCH Reference - FINH ¶22,427 CCH Reference - FINH ¶22,432 Tax Research Consultant CCH Reference - TRC LITIG: 3,154 CCH Reference - TRC LITIG: 3,154.20 IRS Issues Final Regulations Governing Installment Agreements (T.D. 9473) The IRS has issued final regulations relating to the payment of tax liabilities through installment agreements. The regulations reflect changes to the law made by the Taxpayer Bill of Rights II (P.L. 104-168), the Internal Revenue Service Restructuring and Reform Act of 1998 (P.L. 105-206) and the American Jobs Creation Act of 2004 (P.L. 108-357). The final regulations generally adopt proposed regulations issued in March 2007 (NPRM REG-100841-97), with revisions to two provisions made in response to comments received by the IRS. The regulations are effective November 25, 2009. The final regulations adopt without change procedures set forth in the proposed regulations regarding submission and consideration by the IRS of proposed installment agreements, and acceptance, form and terms of installment agreements. The regulations provide that a proposed installment agreement must be submitted according to the procedures prescribed by the IRS, and becomes pending when it is accepted for processing. An installment agreement request is not accepted until the IRS notifies the taxpayer or the taxpayer's representative of the acceptance. The final regulations clarify that partial payment agreements do not reduce the amount of taxes, interest or penalties owed. They also clarify that the IRS may enter into agreements that end before the expiration of the period of limitations on collection. Thus, a partial payment installment agreement ending before the expiration of the collection period of limitations would allow the IRS to collect the balance of the tax liability after the agreement expired. However, the preamble to the final regulations notes that the IRS does not currently enter into partial payment installment agreements that expire before the end of the collection statute and has no plans to do so routinely in the future. The final regulations also require the IRS to review partial payment agreements every two years to determine whether the financial condition of the taxpayer has significantly changed. Further, the regulations provide that, while an installment agreement is in effect, the IRS may require the taxpayer to provide updated financial information at any time. In addition, the final regulations provide that the IRS may not notify a taxpayer of the rejection of an installment agreement until an independent review of the proposed rejection is completed. The final regulations also allow taxpayers to appeal a rejection of an installment agreement to the IRS Office of Appeals within 30 days of being notified of the rejection. The IRS may modify or terminate an installment agreement if it determines that the taxpayer's financial condition has significantly changed or if the taxpayer fails to meet certain requirements. The proposed regulations provided that the IRS may modify or terminate an installment agreement if the taxpayer fails to provide a financial condition update requested by the Service. The final regulations clarify that the IRS may terminate an installment agreement only if the taxpayer provides materially inaccurate or incomplete information in connection with a requested financial update. Further, the final regulations modify the rule provided in the proposed regulations to explicitly allow taxpayers to request a modification or termination of an existing installment agreement. Additionally, the final regulations clarify that a taxpayer must comply with the terms of an existing installment agreement while a request for modification is being considered, and that a proposed modification will not result in a suspension of the statute of limitations on collection. The final regulations generally prohibit the IRS from taking any collection activity while a proposed installment agreement is pending, while an installment agreement is in effect, or during the 30-day period following the rejection of a proposed installment agreement or the termination of an installment agreement. Further, the final regulations provide that the statute of limitations on collection under Code Sec. 6502 is suspended while a proposed installment agreement is pending, plus 30 days following a rejection of a proposed installment agreement, and during any appeal. The final regulations also provide that each taxpayer with an installment agreement must also be provided with an annual statement showing the balance due at the beginning of the year, the payments made during the year, and the remaining balance due at the end of the year. T.D. 9473, 2009FED ¶47,041 T.D. 9473, FINH ¶41,128 Other References: Code Sec. 6159 CCH Reference - 2009FED ¶37,180DF CCH Reference - 2009FED ¶37,180E CCH Reference - FINH ¶20,562 CCH Reference - FINH ¶20,565 Code Sec. 6331 CCH Reference - 2009FED ¶38,186K CCH Reference - FINH ¶21,160 Tax Research Consultant CCH Reference - TRC FILEIND: 21,154.40 CCH Reference - TRC FILEBUS: 6,104.40 CCH Reference - TRC IRS: 45,112.15 IRS Notes Recent Changes to First-Time Homebuyer Credit (IR-2009-108) The IRS has issued a press release noting changes made to the First-Time Homebuyer Credit made by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92). Taxpayers who claim the credit on their 2009 returns will not be able to file electronically, but will have to file a paper return. Taxpayers are also reminded that, for qualifying purchases in 2010, they can choose to claim the credit on either their 2009 or 2010 returns. An IRS video on YouTube discusses various rules related to the credit The IRS has also announced that a new version of Form 5405, First-Time Homebuyer Credit, will be released sometime in the next few weeks. Taxpayers who purchase homes after November 6, 2009, or who claim the credit on their 2009 returns must use this new form. Qualifying taxpayers who purchase a principal residence on or before November 6, 2009, and who claim the credit on an original or amended 2008 return may use the current version of Form 5405. IR-2009-108, 2009FED ¶46,540 Other References: Code Sec. 36 CCH Reference - 2009FED ¶4190.11 Tax Research Consultant CCH Reference - TRC INDIV: 57,950 Employee Benefits, Tax Accounting Projects Dominate 2009-2010 IRS Priority Guidance Plan Employee benefits and tax accounting issues stand out in the IRS's 2009-2010 Priority Guidance Plan, which the Service released on November 24. The guidance plan describes more than 300 areas in which the Service intends to issue final regulations, proposed regulations and other guidance. Some of the projects have already been completed. Employee Benefits In the employee benefits and related areas, the IRS promised to deliver long-awaited final regulations on cafeteria plans under Code Sec. 125. The Service also plans to issue a notice on a sample cafeteria plan under Code Sec. 125. Many of the employee benefits and related guidance projects spring from the Pension Protection Act of 2006 (P.L. 109-280). The IRS intends to issue final regulations on diversification requirements under Code Sec. 401(a)(35), on hybrid plans under Code Secs. 411(a)(13) and 411(b)(5), and final regulations on the determination of the minimum required contributions under Code Sec. 430. Taxpayers can expect more Code Sec. 409A guidance, including guidance on a Code Sec. 409A correction program, the Service reported. The IRS also intends to publish final regulations on income inclusion under Code Sec. 409A. Tax Accounting Tax accounting issues also make up a large part of the priority guidance plan. Among other projects, the IRS intends to issue final regulations under Code Sec. 263(a) regarding the deduction and capitalization of expenditures for tangible assets, proposed regulations under Code Sec. 263(a) regarding the treatment of capitalized transaction costs, and additional guidance under Code Sec. 469 regarding home construction contracts. International Issues The priority guidance plan reflects the IRS's renewed emphasis on international tax issues. The Service intends to issue guidance under Code Sec. 1441 on qualified intermediaries and guidance on cross-border information and filing issues. As in past years, taxpayers can expect guidance on the foreign tax credit. Partnerships and S Corporations In the pass-through area, the IRS intends to issue final regulations on S corporation losses/reduction in tax attributes under Code Sec. 108(b) for discharge of indebtedness income that is excluded from gross income and guidance under Code Sec. 1367 regarding S corporations and back-to-back loans. Taxpayers can also expect final regulations under Code Sec. 108(e)(8) regarding debt satisfied by a partnership interest. By George L. Yaksick, Jr., CCH News Staff Treasury Office of Tax Policy and Internal Revenue Service 2009-2010 Priority Guidance Plan, 2009FED ¶46,543 Other References: Code Sec. 7804 CCH Reference - 2009FED ¶43,266.49 Tax Research Consultant CCH Reference - TRC IRS: 12,350
State Headlines

Kentucky --Corporate Income Tax: Ownership of Partnership Interests Provide Substantial Nexus The Kentucky Court of Appeals has upheld a circuit court decision that a corporation and its affiliates with no physical presence in Kentucky, but with a 99% ownership interest in a Delaware limited partnership doing business in Kentucky, had taxable nexus with Kentucky and, therefore, was required to pay corporation income tax on its distributive share of partnership income. However, the circuit court was reversed in so far as it concluded that the Kentucky statutory three-factor apportionment formula provided the correct method for calculating the taxes because it reasoned that prohibiting taxpayers from using the three-factor formula would subject the formula to possible constitutional problems. The Kentucky Court of Appeals disagreed, finding that the legislature clearly intended for the amount of tax to be calculated using the three factor formula and that this would not result in extraterritorial values being taxed. The circuit court also erred by granting the corporations immediate payment of their refunds because the applicable Kentucky statute clearly directs payment of refunds only upon final appeal. Finally, the Kentucky Court of Appeals ruled that Kentucky legislation that retroactively changed the date for accrual of interest and the rate of interest on refund claims did not violate the U.S. or Kentucky Constitutions because it rationally furthered a legitimate governmental purpose of raising revenue, it did not constitute an unconstitutional taking of property, and it did not amount to impermissible special legislation. Statutory Nexus The taxpayers argued that the circuit court erred in finding the corporations subject to Kentucky taxation because the parties stipulated that the corporations did not own property, lease property, or have individuals receiving compensation in Kentucky. They also argued that the applicable statute relied upon by the circuit court in finding the corporations subject to taxation was void for vagueness and unintelligible. The Kentucky Court of Appeals disagreed, concluding that Kentucky law expresses a clear and intelligible policy that nonresident corporations, such as the corporations in question, which are partners in a partnership doing business within and without Kentucky are taxable on their proportionate share of distributive income passed through the partnership attributable to business done in Kentucky. Constitutional Nexus and Minimum Contacts The taxpayers principally relied on Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in arguing that the substantial nexus requirement under the Commerce Clause of the U.S. Constitution can only be satisfied through a physical presence with the taxing state, which they claimed the corporations did not have with Kentucky. The Kentucky Court of Appeals admitted that application of Quill's physical presence requirement to income tax cases is unclear. However, the court noted that a 99% ownership interest in a partnership doing business in Kentucky and distributions of income from such a partnership gives rise to a substantial nexus with, and/or a physical presence within, Kentucky that satisfies the Commerce Clause requirement. According to the court, such a partnership unquestionably has received protection and benefits from Kentucky, thereby enabling the distribution of income to the corporations. Likewise, the corporations' ownership interest in, and receipt of income from, a partnership doing business in Kentucky provided the requisite minimum contacts link for taxation required by the Due Process Clause of the U.S. Constitution. Revenue Cabinet v. Asworth Corporation, Kentucky Court of Appeals, Nos. 2007-CA-002549-MR, 2008-CA-000023-MR, November 20, 2009, ¶202-892 Other References: Explanations at ¶10-075
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