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November 6, 2009

Federal Headlines

House Clears Unemployment Extension with Tax Provisions

 

House lawmakers voted 403-to-12 to approve the Worker, Homeownership and Business Assistance Act of 2009 (HR 3548) on November 5, clearing the measure for President Obama, who is expected to quickly sign it into law. The strong bipartisan vote came just a day after Senate lawmakers approved the unemployment extension bill by a vote of 98-to-0 (TAXDAY, 2009/11/05, C.3). The president will likely sign the legislation on November 6, the same day that the Department of Labor is expected to release unemployment figures for the month of October. Ways and Means Income Security and Family Support Subcommittee Chairman Jim McDermott, D-Wash., said the measure would give some relief to jobseekers who face an economy where six people are competing for every available job.

 

The legislation provides 14 additional weeks of benefits to all unemployed people who exhaust their benefits. It also gives 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 will be paid for with an extension of the federal unemployment tax (FUTA) until June 30, 2011. The legislation, which was co-sponsored by a bipartisan group of 32 senators, rescues nearly two-million unemployed workers set to exhaust current emergency benefits by December 31, 2009, according to a release from Senate Finance Committee Chairman Max Baucus, D-Mont.

 

The measure also 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 bill proposes an expansion of net operating loss (NOL) rules, allowing all businesses to carry back NOLs for up to five years for losses incurred either in 2008 or 2009, but not both.

 

House Speaker Nancy Pelosi, D-Calif., praised the tax provisions in the bill, calling it a down-payment on the future for middle-class Americans. Pelosi said the homebuyer tax credit has made it easier for families to keep a roof over their heads while simultaneously strengthening the housing market. "The bill also has the net operating loss carryback provisions, which businesses tell us is necessary for them to succeed and to hire new people and also to mitigate for some of the damage that has been done to the economy from past policies," she said.

 

Monica McGuire, senior policy director, taxation, at the National Association of Manufacturers (NAM), said the NOL carryback currently does not provide enough relief for businesses during the prolonged economic downturn. "This provision is urgently needed --more than 20 percent of small and medium-sized NAM members reported NOLs in 2008, and we expect that number to double for 2009," according to McGuire. "Once enacted, this relief will give manufacturers the ability to transform a future tax benefit into cash today and stem the flow of mounting job losses."

Mandatory e-File

 

HR 3548 requires nearly all paid preparers to file their individual clients' returns electronically. "The new provision includes estate and gift tax returns as well," Benson Goldstein, tax senior technical manager for the AICPA, told CCH.

 

A preparer may be exempt from mandatory e-filing if he or she reasonably expects to file 10 or fewer individual returns. "The "reasonably expects" language provides a little latitude but very few professional preparers will be left out," Goldstein noted.

 

By Stephen K. Cooper and George L. Yaksick, Jr., CCH News Staff

Worker, Homeownership, and Business Assistance Act of 2009, as Amended and Passed by the Senate on November 4, 2009, HR 3548

Ways and Means Committee Press Release: House Passes Worker, Homeownership, and Business Assistance Act of 2009

SFC Press Release: Baucus Hails House Passage of Help for Jobless Americans, Tax Relief For Businesses, Homebuyers And Military Families

HR 3548: Summary of the Senate Substitute to Emergency Unemployment Compensation Extension Act

 

$123.5 Million in Undeliverable Refunds Waiting (IR-2009-101)

 

The IRS is seeking 107,831 taxpayers who are due a combined $123.5 million dollars in refund checks that were returned due to mailing address errors. The average refund check amount is $1,148. The checks will be resent as soon as the mailing addresses are updated. The easiest method to update a mailing address or check the status of a refund is to access the IRS website and use the "Where's My Refund?" tool (http://www.irs.gov/individuals/article/0,,id=96596,00.html?portlet=8), Alternatively, taxpayers may call 1-800-829-1954 for instructions on how to update their mailing address. Additional information can be found by listening to a podcast (http://www.irs.gov/pub/newsroom/marketing/internet/undelivered_refunds_2009.mp3) or watching web videos entitled "Undeliverable Refunds" (http://www.youtube.com/watch?v=VCDtJ4QSPLk) and "Track Your Refund" (http://www.youtube.com/watch?v=oBhorAOyIzk).

IR-2009-101

 

Loss from CARDS Transaction Disallowed (Country Pine Finance, LLC, TCM)

 

An LLC that was treated as a partnership was not entitled to claim a loss that resulted from a Custom Adjustable Rate Debt Structure (CARDS) transaction. The loss from the CARDS transaction, which resulted from the swap of euros for dollars as part of a cross-currency swap, was used to offset gain from the sale of an unrelated business. In a CARDS transaction, the proceeds of an initial loan are used to purchase collateral for the loan. At the discretion of the lender, collateral may be swapped that can free loan proceeds for investment. Another party assumes a portion of the loan, but agrees to be jointly and severally liable for the loan. During the loan operation, there are periodic reset dates that allow borrowers to exchange collateral and adjust the interest rate. The assumed portion of the loan proceeds is used for investments that can be swapped for collateral. In theory, an investment is successful if the rate of return exceeds the CARDS cost.

 

The CARDS transactions lacked economic substance and stood no chance of earning a profit. There were no third parties involved in the transaction, and all parties, which included the lender, the initial borrower and the LLC who assumed the loan were involved specifically to enter into the CARDS transaction. The transaction consisted of a number of prearranged steps entered into to generate a tax loss. Further, the loan proceeds were never at risk because the loan amounts never left the lender's control. Although the members of the LLC asserted that the purpose of the transaction was to finance a real estate investment, the members knew that the members would have to purchase the bank's promissory notes to pledge as collateral. None of the parties made additional contributions to capital or used the loan proceeds. Loans that became due were paid back with promissory notes. The terms and interest rates of the currency swap and forward contract allowed the LLC to back out of the transactions and pay nothing but fees. Additionally, credible expert testimony established that the CARDS transaction was cashflow negative. The loan proceeds were used to purchase investments that would never earn a profit and the bank's restrictions on the substitution of collateral that could earn a profit meant that the transaction would always be cashflow negative. Even if the CARDS transaction had a profit potential, the claimed loss generated by the currency swap remained.

 

The claimed loss was also disallowed because the members did not have a nontax business purpose for entering into the CARDS transaction. Testimony that the transaction was entered into to secure financing for future real estate investments was not credible. The members knew or had reason to know that real estate could not be substituted, but entered into the transactions anyway. Additionally, the members entered into the transactions without reading the documents that they signed

Country Pine Finance, LLC, TC Memo. 2009-251, Dec. 57,982(M)

Other References:

 

Code Sec. 701

 

CCH Reference - 2009FED ¶25,062.26

 

Tax Research Consultant

 

CCH Reference - TRC PART: 60,056

 

State Headlines

All States --Sales and Use Tax: Indiana Found Out of Compliance During Review of Eight SST Member States

 

Indiana was found out of compliance with the Streamlined Sales Tax (SST) Agreement during a conference call by the SST Compliance Review and Interpretations Committee (CRIC). In other action, the CRIC found Arkansas, Michigan, Minnesota and Wisconsin "not out of compliance" and it deferred action on Kansas, Kentucky and Tennessee. The determinations were made as part of the annual recertification of each SST member states' compliance with the Agreement. The CRIC made findings on three other states during a previous call. (TAXDAY, 2009/10/30, S.1) It hopes to complete its review of the remaining member states during a call on November 12. The CRIC will submit its findings to the Governing Board for the board's evaluation during a teleconference on December 17, 2009.

 

Indiana was found out of compliance in six areas. Legislation has been drafted to cure the shortcomings. Meanwhile, the Department of Revenue administers the law in most of these areas in conformance with the Agreement. However, Fred Nicely, Council On State Taxation (COST), argued, without objection from Indiana, that the CRIC could not find a state in compliance based on legislation that has only been proposed. Nicely added the finding of noncompliance will provide an incentive for Indiana legislators to pass the necessary legislation.

 

Action was postponed on Kansas and Kentucky while each state issues new guidance to address potential shortcomings. Kansas will revise published guidelines to clarify that all sellers are eligible to use the SST exemption certificate. Kentucky will provide written guidance on the sourcing of digital property accessed electronically and the length of time that a seller has to obtain a fully completed exemption certificate upon request. Representatives of both states indicated that the revised information would be available within the next few days.

 

Action was postponed on Tennessee pending a second vote by the Governing Board on an amendment to the Agreement intended to resolve questions over Tennessee's continued associate membership status. The amendment was given initial approval at the board's recent Oklahoma City meeting (TAXDAY, 2009/10/05, S.1) and is scheduled for a second vote during the December 17 teleconference.

 

Arkansas had neglected to post the SST exemption certificate on its department Web site and was found "not out of compliance" after agreeing to correct this oversight.

 

Michigan agreed to promulgate a regulation to clarify the definition of "bundled transaction," although Dale Vettel, Michigan Department of Treasury, said the state's application of its law is already consistent with the Agreement. The CRIC agreed that Michigan is "not out of compliance."

 

Minnesota was found "not out of compliance" at this time, although it was recognized that the state will be out of compliance as of January 1, 2010, because of its taxation of ringtones. Member states are required to conform to the Agreement's definition of "digital audio works" by the beginning of 2010. Minnesota, however, taxes sales of ringtones but not sales of other items defined as "digital audio works." Legislation to resolve the conflict will be proposed during the 2010 legislative session.

 

Wisconsin was found "not out of compliance" despite Nicely's objection that it risks confusing taxpayers by imposing tax on sales of video games as both "prewritten computer software" and "additional digital goods."

 

 

Conference call, Compliance Review and Interpretations Committee, November 5, 2009

 

New Jersey --Corporate, Personal Income Taxes: Offshore Voluntary Compliance Program Announced

 

The New Jersey Division of Taxation has announced that it will offer a voluntary compliance program to corporate business or gross (personal) income tax taxpayers to identify assets and unreported income from previously sheltered offshore accounts. Individuals and businesses that voluntarily disclose their tax obligation will avoid all civil penalties, including the 50% civil fraud penalty, but not the 5% amnesty penalty. In order to participate in the initiative, individuals or businesses, or their authorized representatives, must apply to the Division by December 31, 2009 by submitting a letter requesting acceptance into the program. The letter should contain the following items:

 

-- The applicant's complete name and address;

 

-- The applicant's New Jersey tax identification number and federal number, if different;

 

-- The tax type and tax years affected with the estimated tax due for each year;

 

-- An explanation of the circumstances to support the application;

 

-- Whether an application was submitted to the IRS offshore voluntary disclosure program;

 

-- A certification that the applicant will cooperate with the Division to establish the correct tax liability and to pay all taxes, interest, and the 5% amnesty penalty incurred as the result of the voluntary disclosure; and

 

-- A completed Appointment of Representative Form (M-5088-R), if relevant.

 

To apply, the above required information should be submitted to Director, New Jersey Division of Taxation, P.O. Box 240, Trenton, New Jersey, 08695-0240.

 

The Division will review and consider all applications and notify the applicant or the applicant's representative of the decision. Within 30 days of acceptance into the program, applicants must submit the estimated tax due, as declared in the application. The applicant must also submit a copy of the IRS acceptance letter into the IRS offshore voluntary disclosure program, copies of the IRS documents reflecting the federal tax examination changes, and the appropriate New Jersey amended or original tax returns. Upon receipt and review of the federal information, the New Jersey tax liability, including tax, interest and the 5% amnesty penalty, will be finalized and billed with payment to be submitted within 30 days.

 

The state urges those individuals and business entities with undeclared offshore assets and income to participate in this program rather than await certain discovery. Failure to do so will result in the imposition of all penalties and may include referral for criminal prosecution.

 

For questions concerning individuals and partnerships, call Supervisor Dan Nagle of the Individual Tax Audit Branch at 609-292-2163. For questions concerning corporations and related business entities, call Supervisor Al Mycols of the Office Audit Branch at 609-984-4129.

Notice, New Jersey Division of Taxation, November 4, 2009
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