IRS Issues Temporary Guidance on Stock Distributions by RICs and REITs Treated as Dividend (Rev. Proc. 2010-12)

The IRS has issued temporary guidance that covers stock distributions by publicly traded real estate investment trusts (REITs) and regulated investment companies (RICs). The new guidance expands upon previously issued guidance in Rev. Proc. 2009-15, I.R.B. 2009-4, 356.

As under the prior guidance, if a RIC or REIT makes a qualifying distribution, the IRS will treat the distribution of stock as a dividend. The amount of such stock distribution will be treated as equal to the amount of money that could have been received instead of stock.

The new guidance further provides that, if a RIC or REIT makes a qualifying distribution and some shareholders receive a combination of stock and money that differs from the combination received by other shareholders and if the fair market value of the stock on the date of distribution differs from the amount of money that could have been received instead, those differences do not cause the distribution to be treated as a preferential dividend.

A qualifying distribution must meet all of the following requirements:

(1) the distribution is made by the corporation to its shareholders with respect to its stock;

(2) stock of the corporation is publicly traded on an established securities market in the United States;

(3) the distribution is declared on or before December 31, 2012, with respect to a tax year ending on or before December 31, 2011 (subject to special timing rules for certain distributions, including distributions made after the close of the tax year);

(4) pursuant to such declaration, each shareholder may elect to receive the shareholder's entire entitlement under the declaration in either money or stock of the distributing corporation of equivalent value, subject to a limitation on the amount of money to be distributed in the aggregate to all shareholders with the value of the distributed shares determined under the formula in item (5), below;

(5) the calculation of the number of shares to be received by any shareholder will be determined over a period of two weeks ending as close as practicable to the payment date based upon a formula utilizing market prices that is designed to equate in value the number of shares to be received with the amount of money that could be received instead; and

(6) with respect to any shareholder participating in a dividend reinvestment plan (DRIP), the DRIP applies only to the extent that, in the absence of the DRIP, the shareholder would have received the distribution in money under item (4), above.

The new temporary guidance is effective with respect to distributions declared on of after January 1, 2008. Rev. Proc. 2009-15, I.R.B. 2009-4, 356, is amplified and superseded.

Rev. Proc. 2010-12, 2010FED ¶46,217

Other References:

Code Sec. 305

CCH Reference - 2009FED ¶15,402.1385

Code Sec. 852

CCH Reference - 2009FED ¶26,433.26

Code Sec. 857

CCH Reference - 2009FED ¶26,533.025

Tax Research Consultant

CCH Reference - TRC RIC: 3,202

2010 Inflation Adjustments for Air Transportation Excise Taxes Released (IR-2009-120)

The IRS has released the inflation-adjusted air transportation tax rates for tax years beginning in 2010. For calendar year 2010, the Code Sec. 4261(b) excise tax on the amount paid for each domestic flight segment of taxable transportation by air increases to $3.70, up from $3.60 in 2009. The Code Sec. 4261(c) excise tax on any amount paid for transportation of persons by air will remain at $16.10 for international travel beginning or ending in the United States. For a domestic flight segment beginning or ending in Alaska or Hawaii, the Code Sec. 4261(c) tax applies to departures at the rate of $8.10, up from $8.00 in 2009.

The vehicle for announcing the other 2010 inflation adjustments, Rev. Proc. 2009-50, which was issued on October 15, 2009, did not include 2010 adjusted tax rates for the air transportation taxes imposed by Code Sec. 4261(b) and (c). This is because the Fiscal Year 2010 Federal Aviation Administration Extension Act (P.L. 111-69) extended these taxes only through December 31, 2009. However, on December 16, President Obama signed the Fiscal Year 2010 Federal Aviation Administration Extension Act, Part II (P.L. 111-116), which extended the authority to collect the air transportation excise taxes through March 31, 2010.

IR-2009-120, ETR ¶66,888

Other References:

Code Sec. 4261

CCH Reference - ETR ¶19,305.014

CCH Reference - ETR ¶19,305.02

CCH Reference - ETR ¶19,305.495

Tax Research Consultant

CCH Reference - TRC EXCISE: 9,102.05

CCH Reference - TRC EXCISE: 9,104.05

Extended Statute of Limitations for Assessment Applied upon Failure to Disclose Son-of-Boss Partnership Transaction; Disclosure Regulations Not Invalid (BLAK Investments, TC)

The statute of limitations for assessing tax against married taxpayers who formed a partnership that engaged in a listed transaction but failed to properly disclose the transaction on their income tax return or the partnership's income tax return remained open by reason of Code Sec. 6501(c)(10), as added by American Jobs Creation Act of 2004 (P.L. 108-357) (Jobs Act).

This provision extends the limitations period until one year after the required disclosure statement is provided. The taxpayer's contention that the effective date of Code Sec. 6501(c)(10) provided by Act Section 814(b) of the Jobs Act was inapplicable was rejected. Further arguments that regulations requiring the identification of listed transactions on a taxpayer's tax return were invalid as a result of IRS's failure to comply with various administrative requirements related to the issuance of the regulations also failed.

In a transaction that occurred in 2001, the taxpayers generated funds through the short sale of borrowed Treasury notes and contributed the funds and obligation to cover the short sale to a partnership in exchange for partnership interests. They each claimed a basis in their partnership interest that included the short sale proceeds, unreduced by the obligation to cover the short sale. Upon disposition of their partnership interests, they claimed substantial tax losses even though there was no economic loss.

The court determined that the transaction was a listed transaction because it was substantially similar to the Son-of-Boss transactions described in Notice 2000-44, 2000-2 CB 255. These transactions involve the generation of funds through the creation of a liability and the contribution of the funds or an asset purchased with the funds and the associated liability to a partnership without any adjustment in the basis of the partnership interest received for the liability.

The taxpayers' filed their 2001 income tax return more than three years before the issuance of the IRS's final partnership administrative adjustment (FPAA). Consequently, the general limitations period had expired. The IRS, however, contended that the transaction was a listed transaction described in Code Sec. 6707A(c)(2) and that the failure of the partners or partnership to disclose the transaction on their tax returns triggered the extended limitation periods of Code Sec. 6501(c)(10). If a taxpayer fails to include a statement required under Code Sec. 6011 with respect to a listed transaction as defined in Code Sec. 6707A(c)(2), as added by the Jobs Act, Code Sec. 6501(c)(1) extends the limitations period until one year after the statement is provided.

Code Sec. 6501(c)(10) was made effective for tax years "with respect to which the period for assessing a deficiency did not expire before" October 22, 2004. On October 22, 2004, the period for assessing a deficiency with respect to the taxpayers' 2001 tax year was open. Therefore, if the effective date provided in Act Section 814(b) applied,Code Sec. 6501(c)(10) extended the limitations period for the taxpayers' 2001 tax year.

However, the taxpayers argued that, because Code Sec. 6707A, which imposes a penalty for failure to include information with respect to a reportable or listed transaction as required by Code Sec. 6011, is effective for returns and statements the due date for which is after October 22, 2004, and which were not filed before that date, Code Sec. 6501(c)(10) cannot apply to any transaction for which a return or statement was due on or before October 22, 2004.

The court rejected this argument noting the different purposes of the effective dates in the two provisions. Code Sec. 6707A was enacted to impose a penalty prospectively on a taxpayer who failed to meet the reporting requirements of Code Sec. 6011 with respect to listed transactions. The effective date of Code Sec. 6501(c)(10) was intended to keep open limitations periods that had not yet expired as of October 22, 2004, if the taxpayer failed to make the required Code Sec. 6011 disclosure of involvement in a listed transactions on a return that was due before that date.

The court noted that extending an unexpired limitations period is not an impermissible retroactive action. Further, application of the effective date for Code Sec. 6707A to Code Sec. 6501(c)(10) would render the stated effective date of Code Sec. 6510(c) meaningless. If Congress had intended Code Sec. 6501(c)(10) to apply to a transaction for which a statement was due after October 22, 2004, it could have expressly done so.

The court also rejected the taxpayers' arguments that Temporary Reg. §1.6011-4T, which applied to the tax year at issue and required disclosure of participation in listed transactions, was invalid by reason of the IRS's determination that the regulation was not a significant regulatory action requiring review by the Office of Management and Budget in accordance with Executive Order 12866, 3 C.F.R. 638 (1994). That Executive Order specifically denies taxpayers the authority to challenge such a determination.

Further, the IRS's decision that the regulations would not have significant economic impact on a substantial number of small entities and was, therefore, exempted from the preparation of a regulatory flexibility analysis otherwise required by the Regulatory Flexibility Act (5 U.S.C. section 603-604) was proper. Finally, the use of a cross reference in the final regulations to incorporate the rules of the temporary regulations for transactions prior to the generally applicable effective date of the final regulations was not a violation of the notice and comment requirements of the Administrative Procedure Act.

BLAK Investments, 133 TC No. 19, Dec. 58,039

Other References:

Code Sec. 6011

CCH Reference - 2009FED ¶35,141.70

Code Sec. 6501

CCH Reference - 2009FED ¶38,967.328

Tax Research Consultant

CCH Reference - TRC FILEBUS: 3,052.20

CCH Reference - TRC PENALTY: 3,252.106

Illinois --Sales and Use Tax: Airline's Second Refund Claim Barred by Statute of Limitations

An airline company's second refund claim seeking additional refunds of Illinois use tax erroneously paid on exempt aviation fuel used on international flights was barred because it was filed after the statute of limitations and the taxpayer had not entered into an agreement with the Department of Revenue to extend the limitations period.

The Court of Appeals reversed a circuit court ruling and held that the second refund claim was not an amendment to the taxpayer's first refund claim, which was timely filed, but rather was a separate claim, based upon different transactions with different factual and legal predicates.

 Separate Refund Claim

Specifically, the taxpayer's first refund claim was based upon the definition of "foreign trade" in then-recent IRS Revenue Ruling 2002-50, under which both passengers and cargo had to be disembarked in foreign territory. However, the second refund claim was based upon the Illinois use tax exemption for fuel used on international flights, which included flights that carried passengers and/or cargo that did not continue to a destination outside the United States.

Because the second refund claim was premised upon a different legal principle than the first claim and involved different types of international flights, it was subject to, and failed to meet, the statute of limitations that was relevant to the claim.

 Relation-Back Doctrine

The statute of limitations for the second refund claim was not tolled by the relation-back doctrine under the Code of Civil Procedure because the procedures and time requirements for use tax refunds were fully regulated by the Illinois Use Tax Act, which contained no reference to the relation-back doctrine.

Finally, the court rejected the taxpayer's equitable and constitutional claims. Alleged errors or confusion within the department during the audit occurred after the statute of limitations for the second refund claim had already expired.

American Airlines, Inc., v. Department of Revenue, Illinois Appellate Court, First District, No. 1-08-2985, December 18, 2009

Kentucky --Sales and Use Tax: Online Travel Companies Not Subject to Local Transient Room Tax

The U.S. Court of Appeals for the Sixth Circuit has affirmed a district court's decision to dismiss claims by two Kentucky counties that online travel companies (OTCs) were violating ordinances imposing a transient room tax on the rental of rooms by hotels and similar businesses. The counties alleged that the OTCs violated the ordinances by failing to pay the tax on the difference between the wholesale price for rooms that OTCs negotiate and pay to hotels and the higher retail rate paid to the OTCs by customers. The OTCs remit the tax to the hotels based on the lower wholesale price.

The Sixth Circuit agreed with the district court that, unlike hotels, OTCs do not have ownership or physical control of the rented rooms and, therefore, they do not constitute "like or similar accommodations businesses" within the plain meaning of the ordinances in question. In doing so, the court rejected arguments by the counties that the phrase indicated a legislative intent to broaden the tax and that limiting the tax to brick-and-mortar establishments rendered the phrase meaningless.

The court also disagreed with the contention that OTCs benefit from the express purpose of the tax, which is used by the counties to finance the promotion and attraction of tourism. According to the court, the OTCs lacked physical presence in the areas governed by the ordinances and, therefore, would not "specially" benefit from any increase in tourism in those areas.

Although the court admitted that the wording of the ordinances, based on the language used and discernible legislative intent, was inconclusive as to whether OTCs fall into the same category of businesses subject to the tax, the court found sufficient guidance to suggest otherwise in Kentucky case law interpreting the tax, rules of statutory construction, and case law from other jurisdictions. Moreover, any doubt as to whether OTCs constitute "like or similar accommodations businesses", the court said, must be resolved in favor of the OTCs under Kentucky law. Finally, the Kentucky General Assembly, not the court, was the proper entity to close any potential tax loophole for OTCs that exists in the ordinance enabling statute.

Other References:

Explanations at ¶60-480