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November 3, 2009

Federal Headlines

Senate Set to Vote on Unemployment Extension with Tax Provisions

 

The Senate on November 2 approved, by an 85-to-2 margin, a motion allowing lawmakers to take-up a substitute amendment to a House-approved measure, the Unemployment Compensation Extension Bill of 2009 (HR 3548), which includes several tax-related provisions in addition to extending unemployment benefits. The cloture vote allows for 30 hours of debate, but GOP lawmakers could give up some or all of their allotted time, which would allow a final vote on passage to take place sooner. A spokesperson for Senate Majority Leader Harry Reid, D-Nev., said the Senate would complete action on the bill by November 4 at the latest.

 

The Worker, Homeownership, and Business Assistance Bill of 2009, offered by Reid and Senate Finance Committee Chairman Max Baucus, D-Mont., would provide 14 additional weeks of benefits to all unemployed people who exhaust their benefits. It would also give six additional weeks of benefits to unemployed people who exhaust their benefits in states with 8.5-percent unemployment or more. The total cost of the package is $2.4 billion and would be paid for with an extension of the federal unemployment tax (FUTA) until June 30, 2011.

 

Unlike the House bill, which contains no tax provisions, the Senate substitute legislation extends the $8,000 tax credit for first-time homebuyers through April 2010 and allows a reduced credit of $6,500 for homeowners who have lived in their current residence for five years or more. The amendment also increases the income limits, allowing potential joint filers earning less than $225,000, and single filers earning less than $125,000 to be able to claim the credit. Homes that are worth more than $800,000 would not be eligible for the credit. In addition, the revised credit includes a binding contract provision that would effectively make the credit available until June 30, 2010, so long as the homebuyer entered into a binding contract before May 1.

 

The extended tax credit would also continue to allow military personnel to claim the credit for an additional year. Under that provision, the first-time homebuyer tax credit would be available to members of the uniformed services and the Foreign Service and intelligence employees who are required to relocate before the end of the three-year holding period required for property. Eligible service members would not have to repay the $8,000 first-time homebuyer credit if they are called up for duty overseas and forced to sell their homes within three years of purchase.

 

Businesses would gain by an expansion of net operating losses (NOLs) rules. Under current law, NOLs may generally be carried back for two years. In the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) (P.L. 111-5), the NOL carryback period was extended from two to five years for tax years beginning in or ending in 2008 for small businesses with gross receipts of $15 million or less. The Reid-Baucus proposal would allow all businesses to carry back NOLs for up to five years for losses incurred either in 2008 or 2009, but not both.

 

Businesses would be able to offset 50 percent of the available income from the fifth year and 100 percent of all income in the remaining four carryback years. Small businesses that have already elected to carry back 2008 under the 2009 Recovery Act may also elect to carry back losses from 2009. The proposal is estimated to cost $10.4 billion over 10 years.

 

The measure is completely paid for by delaying the effective date for foreign companies' interest income allocation rules from 2010 to 2017. It also contains a provision that increases penalties for taxpayers that fail to timely file partnership and S corporation returns. The House is expected to quickly approve the Senate version.

 

By Jeff Carlson, CCH News Staff

SFC Press Release: Floor Statement of Sen. Baucus Regarding Unemployment Insurance

 

Post-Bankruptcy Jeopardy Levy Proper Where Levied Funds Subject to Pre-Bankruptcy Lien (Prince, TC)

 

A post-bankruptcy jeopardy levy with respect to an individual's funds that were seized by the police before the individual filed for bankruptcy was proper where the funds belonged to the individual's pre-bankruptcy estate and were subject to a pre-bankruptcy tax lien. Even though the bankruptcy discharge relieved the taxpayer from personal liability for his unpaid tax liabilities, it did not protect the seized funds from the jeopardy levy that was served after the bankruptcy since the funds were subject to a federal tax lien that was properly filed by the IRS before the taxpayer filed his bankruptcy petition. The taxpayer also did not include these funds in the schedules of debtor's assets attached to his bankruptcy petition. The taxpayer's argument that the jeopardy levy was improper because the levied money did not belong to him was rejected because the taxpayer could not raise claims on behalf of third parties in a lien or levy case. To the extent the IRS incorrectly levied against third parties, those third parties may have the right to bring a wrongful levy action.

 

In addition, the IRS's determination that a jeopardy levy was appropriate was not an abuse of discretion because, as a result of the bankruptcy court's discharge of the taxpayer's tax liabilities, the IRS's collection efforts could proceed only against the taxpayer's pre-bankrutpcy estate assets that were subject to a valid lien, such as the levied funds. If the IRS were prevented from levying upon such funds and the funds were then dissipated, it could be unable to collect all of the unpaid tax liabilities of the taxpayer.

 

Finally, the court rejected the taxpayer's argument that he did not receive timely notice of the jeopardy levy since such a claim was not supported by the evidence. The IRS sent a notice of the jeopardy levy and the taxpayer's right to administrative and judicial review of the levy on the date the IRS served the jeopardy levy. In addition, the taxpayer engaged in a telephone conversation with an IRS officer regarding the administrative review of the jeopardy levy and subsequently took full advantage of the review. Under those circumstances, even though there was no evidence to support the taxpayer's claim for untimely notice, any such error would have been harmless.

J.A. Prince, 133 TC --, No. 12, Dec. 57,977

Other References:

 

Code Sec. 6331

 

CCH Reference - 2009FED ¶38,187.15

 

CCH Reference - 2009FED ¶38,187.70

 

Code Sec. 7429

 

CCH Reference - 2009FED ¶41,736.16

 

CCH Reference - 2009FED ¶41,736.24

 

Tax Research Consultant

 

CCH Reference - TRC IRS: 51,158.25

CCH Reference -

TRC IRS: 54,200

CCH Reference -

TRC LITIG: 6,854

 

Interest Abated for Periods With Unjustified IRS Administrative Inactivity (Burcaro, TCM)

 

The IRS abused its discretion in refusing to abate an assessment of interest on an individual's unpaid tax liabilities during certain periods that the taxpayer's income tax return was under examination. The IRS limited its allowance of the taxpayer's interest abatement request to a five-month and a six-month period occurring during the multi-year examination of the taxpayer's return. Review of the administrative record, however, found additional periods during which the taxpayer was entitled to interest abatement where the IRS, without explanation, took no action whatsoever or failed to perform required administrative acts.

 

A review of the entire case activity record showed that the IRS did not abuse its discretion in failing to abate interest for one period, since the record revealed that the examining officer worked diligently on the examination and was in regular contact with the taxpayer. The IRS, on its own accord, abated interest with respect to other periods of time because there was no record of activity on the examination during the period. Although the progress of the examination was subsequently delayed by quality issues discovered by superiors of the examining officer, the IRS's determination not to abate interest through a particular date was not an abuse of discretion since the delay was not due to the failure to perform a ministerial or managerial act. Similarly, abatement was not granted for a period after the reassignment of the case to a new Appeals Officer who acted diligently by meeting with the individual and settling the case. However, the IRS did abuse its discretion in not abating interest accrued during other periods because it failed to explain why it did not schedule the taxpayer's appeals conference, otherwise take meaningful action to move the appeal forward or take any administrative actions during these time frames.

 

The taxpayer's general argument that all the interest should have been abated on account of the unproductiveness and unfairness of the examination and administrative appeal process was rejected. Although the IRS abated interest for the two periods that it determined that the administrative record did not indicate what actions, if any, its examiners took with respect to the taxpayers case, the partial abatement was not an admission that the examination and Appeals process was unproductive. The results of an examination are generally not relevant to an interest abatement request. Furthermore, even if lack of productivity were a proper basis to abate interest, the examination was productive insofar as the taxpayer and IRS discussed multiple issues throughout the examination, some of which were resolved in the taxpayer's favor while others were resolved in the IRS's favor. Ultimately, the taxpayer and IRS agreed to the amount of income tax deficiencies even though the amount was approximately equal to a settlement originally offered by the taxpayer.

R.J. Bucaro, TC Memo. 2009-247, Dec. 57,978(M)

Other References:

 

Code Sec. 6404

 

CCH Reference - 2009FED ¶38,580.50

 

Tax Research Consultant

 

CCH Reference - TRC IRS: 33,400

CCH Reference - TRC PENALTY: 9,056.20

 
 

State Headlines

Ohio --Multiple Taxes: U.S. Supreme Court Agrees to Review Tax Injunction Act, Comity Issues

 

The U.S. Supreme Court has granted a request by the Ohio Tax Commissioner to consider whether the federal Tax Injunction Act (TIA) or principles of comity bar federal court jurisdiction over a case alleging that Ohio violates the U.S. Constitution by providing commercial activity tax (CAT) and sales and use tax benefits to local natural gas distribution companies (LDCs) that are not available to independent retail natural gas suppliers. The commissioner had sought review of a decision by the U.S. Court of Appeals for the Sixth Circuit, which affirmed a holding that the TIA did not bar the suit and reversed another ruling in the same decision that the suit was barred under general principles of comity and federalism. (TAXDAY, 2009/08/27, S.13)

 

Retail suppliers are subject to the CAT and their customers pay sales tax on their purchases of natural gas. LDCs do not pay the CAT and their customers are exempt from sales tax on their purchases of natural gas. However, the LDCs, but not the retail suppliers, pay a special gross receipts excise tax, a cubic-feet tax on the volume of gas sold and delivered, and a personal property tax.

 

The retail suppliers filed a lawsuit in federal court alleging that the different tax treatment violated the Equal Protection and Commerce Clauses of the U.S. Constitution. They sought an injunction to prevent the commissioner from enforcing the CAT exclusion and sales and use tax exemptions benefitting the LDCs and their customers. The commissioner moved to dismiss the suit under TIA and comity principles.

 

The U.S. District Court for the Southern District of Ohio held that the TIA did not bar the lawsuit under Hibbs v. Winn, 542 U.S. 88 (2004), but it dismissed the suit under general principles of comity and federalism. The U.S. Court of Appeals for the Sixth Circuit affirmed the holding that the TIA did not bar the suit. In addition, the appellate court held that comity did not bar the suit because it challenged only a few limited exemptions affecting four specific entities, and its success would not significantly intrude upon traditional matters of state taxation in Ohio. (TAXDAY, 2009/02/09, S.23)

 

Levin v. Commerce Energy, Inc., U.S. Supreme Court, Dkt. 09-223, petition for certiorari granted November 2, 2009

Tennessee --Corporate Income Tax: Investment Income Not Subject to Apportionment

 

For Tennessee excise tax purposes, an out-of-state corporation's interest income earned on investments in U.S. Treasury securities constituted nonbusiness earnings that were not subject to apportionment. The income earned from investment in the securities was not used to fund the taxpayer's operational business in Tennessee and therefore could not be taxed by Tennessee. Although evidence showed potential for a relation to exist between the use of the income earned from investment and the taxpayer's business activities in Tennessee, the constitutionality of the tax assessment is premised on the existence of an actual relation between the income earned out of state and the in-state operations.

Siegel-Robert Inc v. Johnson, Commissioner of Revenue, Tennessee Court of Appeals, No. M2008-02228-COA-R3-CV, October 28, 2009, ¶401-346

 

Other References:

 

Explanations at ¶11-515

 
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