IRS Announces Upcoming Revenue Procedures, Remedial Period and Reliance Regarding Code Sec. 403(b) Plans (Ann. 2009-89)

The IRS has issued guidance regarding Code Sec. 403(b) plans which provides for a remedial amendment period and reliance for employers that, pursuant to upcoming revenue procedures, either adopt a pre-approved plan with a favorable opinion letter or apply for an individual determination letter when available. The IRS expects to publish, within the next few months, a procedure for obtaining an opinion letter that the form of a prototype or other "pre-approved plan" meets the requirements of Code Sec. 403(b) and the regulations thereunder. The procedure will reflect the IRS's consideration of comments it has received on the draft revenue procedure that was provided in Announcement 2009-34 (TAXDAY, 2009/04/15, I.1). Subsequently, the IRS intends to publish a procedure for obtaining an individual determination letter for a Code Sec. 403(b) plan.

If the relevant condition under Notice 2009-3, I.R.B. 2009-2, 250, with respect to adopting a plan on or before December 31, 2009, is met, and, pursuant to the upcoming revenue procedures, the employer sponsoring the plan either adopts a pre-approved plan that has received a favorable opinion letter from the IRS or applies for an individual determination letter when available, the employer will have a remedial amendment period in which to amend the plan to correct any form defects retroactive to January 1, 2010. Also, beginning January 1, 2010, the form of the employer's written plan will be considered to satisfy the requirements of Code Sec. 403(b) and the regulations, provided that, during the remedial amendment period, the pre-approved plan is adopted retroactive to January 1, 2010 or the plan is amended to correct any defects in the form of the plan retroactive to January 1, 2010.

The remedial amendment provision will be included in the upcoming revenue procedures. Also, the revenue procedures will address the time-frames for adopting a pre-approved plan or applying for a determination letter and other details regarding the remedial amendment period. Employers may continue to rely on the model plan language in Rev. Proc. 2007-71, I.R.B. 2007-51, 1184.

Employers may rely on the new guidance prior to publication of the revenue procedure for pre-approved Code Sec. 403(b) plans. Employers should not request ruling or determination letters on the form of their Code Sec. 403(b) plans at this time, pending publication of the revenue procedure for pre-approved Code Sec. 403(b) plans and additional procedures on applying for individual determination letters for Code Sec. 403(b) plans.

Announcement 2009-89, 2009FED ¶46,555

Other References:

Code Sec. 403

CCH Reference - 2009FED ¶18,282.077

CCH Reference - 2009FED ¶18,282.11

Tax Research Consultant

CCH Reference - TRC RETIRE: 9,050

CCH Reference - TRC RETIRE: 51,100

Guidance Provided for Special Rules Applicable to Certain Employment Taxes (Rev. Rul. 2009-39)

The IRS has issued guidance regarding how an employer corrects employment tax reporting errors using the interest-free adjustment and refund claim processes under Code Secs. 6205, 6402, 6413 and 6414 in a number of situations. The guidance refers to corrections made pursuant to Code Secs. 6205 and 6413 of underpayments or overpayments, respectively, resulting from employment tax reporting errors as having been made using the adjustment process. It also refers to corrections made pursuant to Code Secs. 6402 and 6414 of overpayments resulting from employment tax reporting errors as having been made using the refund claim process, and analyzes the applicable regulations.

Situations. Ten situations were analyzed: (1) an underpayment of Federal Insurance Contributions Act (FICA) tax and income tax withholding (ITW) when the error is not ascertained in the year the wages were paid; (2) an overpayment of ITW when the error is ascertained in the same year the wages were paid; (3) both an overpayment and an underpayment of FICA tax for the same tax period; (4) an underpayment of FICA tax when the employer's filing requirement has changed; (5) an underpayment of FICA tax and ITW resulting from a failure to file an employment tax return because the employer failed to treat any workers as employees; (6) an overpayment of FICA tax on wages paid to a household employee; (7) an overpayment of FICA tax when the error is ascertained close to the expiration of the period of limitations on credit or refund; (8) an underpayment of FICA tax and ITW ascertained in the course of an employment tax examination; (9) an underpayment of FICA tax and ITW ascertained in the course of the appeals process; and (10) an underpayment of FICA tax and ITW resulting from the misclassification of employees ascertained in the course of the appeals process.

As a result of T.D. 9405 and the new guidance, Rev. Rul. 75-464, 1975-2 CB 474, is no longer determinative of when interest-free adjustments are made in the context of an employment tax examination and is obsolete.

Rev. Rul. 2009-39, 2009FED ¶46,556

Other References:

Code Sec. 6205

CCH Reference - 2009FED ¶37,523.10

Code Sec. 6402

CCH Reference - 2009FED ¶38,519.395

Code Sec. 6413

CCH Reference - 2009FED ¶38,770.35

Code Sec. 6414

Tax Research Consultant

CCH Reference - TRC IRS: 33,108

CCH Reference - TRC PAYROLL: 9,308

Exception Added to Provision Treating New Target as New Corporation (Notice 2010-1)

The IRS has added an exception under Reg. §1.338-1(b)(2) to the provision that treats a new target corporation as a new corporation unrelated to the old target if a Code Sec. 338 election is made. In the case of a life insurance company, for purposes of Code Sec. 807(e)(4), the new target and the old target will be treated as the same corporation.

2009FED ¶46,557

Other References:

Code Sec. 338

CCH Reference - 2009FED ¶16,288.32

Code Sec. 807

CCH Reference - 2009FED ¶25,821.40

Tax Research Consultant

CCH Reference - TRC CCORP: 30,252

Comparable Uncontrolled Transaction Method Was Best Method to Compute Cost-Sharing Buy-In Payment (Veritas Software Corp., TC)

The comparable uncontrolled transaction (CUT) method, used to calculate a buy-in payment for certain preexisting intangibles made by a foreign subsidiary corporation to its parent, pursuant to a cost sharing arrangement for the development and manufacture of storage management software products, was found to be the best method for determining such buy-in payment. The IRS's determination that the buy-in payment should have been calculated using an income method, and the factors it used in making its calculations under such method, were found to be arbitrary, capricious and unreasonable.

The IRS relied on the testimony of an expert at was found to be unsupported, unreliable, and unconvincing. The expert used the wrong useful life for the product and the wrong discount rate.

Moreover, the notice of deficiency relied on a report by a non-witness expert that resulted in a valuation one third higher than the valuation the IRS subsequently claimed at trial. This, together with other factors, suggested that the deficiency notice was arbitrary, capricious and unreasonable. Such other factors included a concession at trial by the IRS's expert that the beta factor he used by the in calculating the appropriate discount rate for the buy-in payment was erroneous.

The IRS's modified computation of the correct buy-in payment in its amendment to its answer was also arbitrary, capricious and unreasonable. It relied on an assumption that the transfer of preexisting intangibles was akin to a sale of the US parent's business to its foreign subsidiary, that short-lived intangibles should be valued as though they would have perpetual life, and that subsequently developed, rather than just preexisting intangibles, should be factored in. This approach was found to be unreliable. Moreover, the IRS allocation took into account items not transferred or of insignificant value, as well as rights to future co-developed intangibles in violation of Reg. §1.482-7(g)(2). It also employed the wrong useful life, discount rate and growth rate in computing the appropriate buy-in payment.

By contrast, the CUT method employed by the taxpayer satisfied the best method rule of Reg. §1.482-1(c) and was found to be essentially reliable. Certain adjustments were, however, made, including the starting royalty rate, the appropriate useful life of the preexisting product intangibles, the royalty degradation rate, the value assigned to trademark intangibles and sales agreements, and the appropriate discount rate.

Veritas Software Corp., 133 TC No. 14, Dec. 58,016

Other References:

Code Sec. 482

CCH Reference - 2009FED ¶22,283.107

CCH Reference - 2009FED ¶22,283.48

Tax Research Consultant

CCH Reference - TRC ACCTNG: 30,102.10

TRC INTL: 15,104

CCH Reference - TRC INTL: 15,104.10

Utah --Severance Tax: Court Clarifies Application of ExxonMobil Case to Deficiency and Refund Actions

The Utah Supreme Court has ruled that a limitation against retroactive application of the severance tax valuation holding in ExxonMobil Corp. v. Utah State Tax Commission, Utah Supreme Court, 86 P.3d 706, 2003 UT 53, November 25, 2003, does not apply to severance tax deficiency actions but continues to apply to refund actions initiated by taxpayers. The court handed down the ruling in a case where an oil company sought a refund of severance taxes. At issue in the case were valuation methods and the commission's proration of an annual tax exemption.

 Scope of Application of ExxonMobil

While the oil company's appeal was pending before the commission, the court held in ExxonMobil that valuation for severance tax purposes should occur in the immediate vicinity of the point at which the oil or gas is physically removed from the earth, but that to qualify as the point where production is completed, a point must be where oil and gas sales may actually occur. To avoid extensive refunds of taxes already collected and spent by governmental entities, the court expressly limited any retroactive application of the case to ExxonMobil Corp. Further, the court limited the holding to prospective application with respect to other parties that had refund requests, deficiency proceedings, or similar matters pending before the commission at the time. As a result, the court held in the current case that the ExxonMobil valuation analysis applied to one of the deficiency notices because it was issued after, and was not pending at the time of, the ExxonMobil decision.

The court also held in the current case that the ExxonMobil analysis applied to deficiency assessments issued by the commission that were unresolved at the time of the ExxonMobil decision. In so holding, the court reasoned that deficiency assessments do not give rise to the same revenue concerns for governmental entities as refund requests, given that deficiency assessments do not involve taxes that have already been collected and spent. Accordingly, the court remanded the valuation issues to which it found that the ExxonMobil valuation analysis would apply.

 Annual Exemption

Utah law provides an exemption from severance tax for the first $50,000 annually in gross value of each well or wells to be prorated among the owners in proportion to their respective interests. "Well or wells" is statutorily defined as any extractive means from which oil or gas is produced or extracted, located within an oil or gas field, and operated by one person. The commission had found that the oil company's operation of multiple wells in a field constituted a single "means." Given the plain language of the statute and the fact that exemptions require narrow construction, the court agreed with the commission's interpretation that the annual exemption is a "field exemption" rather than a "well exemption" applicable to each well individually.

With regard to the proration of the annual exemption, the court noted that taxes should be imposed equally and without discrimination so that the tax burden is distributed fairly. As a result, the court agreed with the commission that each owner in the annual oil and gas production was entitled to a proportional share of an exemption of the first $50,000 from production.

Other References:

Explanations at ¶45-001

Wisconsin --Corporate, Personal Income Taxes: Highest Applicable Rates for Estimated Payments Discussed

The Wisconsin Department of Revenue has issued a personal income and corporation franchise and income tax notice regarding the withholding rates that apply to income distributable to a nonresident partner, member, shareholder, or beneficiary. For an individual, estate, or trust, the applicable withholding rate is 7.75%. For a partnership, limited liability company (LLC), or corporation, the applicable withholding rate is 7.9%.

Legislation enacted in 2009 changed the highest tax rate applicable to a single individual (and, thus, to pass-through entities) from 6.75% to 7.75%. Taxpayers need to be aware that a Form PW-1 and associated quarterly estimated withholding payments are required, regardless of whether a Form 1CNS or 1CNP is filed.

The estimated quarterly withholding payments for the entire taxable year beginning on or after January 1, 2009, are based on the new 7.75% tax rate. Therefore, the 7.75% rate applies to the entire taxable year. To address situations in which pass-through entities had already made payments based on the old 6.75% rate, the law provides for transitional catching up provisions. The transitional provisions allow pass-through entities to make up for the difference in payment between the old and new rates.

The text of the notice is available at http://www.dor.state.wi.us/taxpro/news/091210.html.

News for Tax Practitioners, Wisconsin Department of Revenue, December 10, 2009