Tax Newsletter - 2007

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February 5, 2009


Federal Headlines

Senate Approves $15,000 Homebuyers Tax Credit The Senate on February 4 continued to add to the $900 billion cost of the economic stimulus package as lawmakers approved another costly tax break, giving homebuyers a sizeable above-the-line deduction for purchases made during the 12-month period following enactment of the bill. The amendment process continues on February 5 as Congressional leaders press on with their pledge to have a bill ready for President Obama's signature by the Presidents Day recess, which begins on February 13. "The stark reality is that we need to complete this bill," said Senate Majority Leader Harry Reid, D-Nev., adding that he wants to wrap up the measure by the end of the week of February 2. Approved Amendments The Senate easily approved the amendment offered by Sen. Johnny Isakson, R-Ga., which would provide an income tax credit up to $15,000 for home purchases. It was cleared by unanimous consent and, at an estimated cost of $18.5 billion, it may prove a bargain for members concerned about the rising price tag of the bill. The push and pull bargaining mentality taking place between Republican and Democratic Senate leaders finds GOP leaders trying to steer more funds toward the housing market while at the same time appease members who want to keep down the overall cost of the package. Passing the amendment was largely seen as a potential trade off with Republicans who have also proposed a temporary reduced mortgage rate of 4 percent on home purchases. Sen. John Ensign, R-Nev., has pushed the idea, but many rank and file members in both parties fear that the $300 billion estimated price tag would overly inflate an already bloated stimulus package. It remains unclear whether Ensign still plans to offer that amendment. Additional tax cuts are already beginning to prove costly and somewhat troubling to fiscal conservatives. An amendment by Sen. Barbara Mikulski, D-Md., approved on February 3 (TAXDAY, 2009/02/04, C.1) would help out the troubled auto industry, but carries an $11 billion price tag over a 10-year period. The proposal allows for an above-the-line deduction on the taxable interest on vehicles purchased after November 12, 2008, and December 31, 2009. The deduction applies to cars costing no more than $49,500 and for individuals with incomes under $125,000, or $250,000 for joint filers. Before adjourning for the night, the Senate also approved a bipartisan proposal offered by Sens. Christopher S. Bond, R-Mo., and Christopher J. Dodd, D-Conn., to swap out $2 billion from the HOME program (Code Sec. 42) for investment in the low-income housing tax credit projects. Lawmakers also defeated, by a 37-60 margin, a proposal by Sen. John Cornyn, R-Tex., to supplant the key $500 middle-class tax cut prized by President Obama with a reduction of the 10-percent income tax rate to 5 percent. A massive, tax-cut laden substitute amendment offered by Sen. Jim DeMint, R-S.C., was defeated handily by a 36 to 61 margin. A proposal by Sen. Jim Bunning, R-Ky., to suspend for 2009 the 1993 income tax increase on Social Security benefits was defeated by a vote of 39 to 57. Following a White House meeting on February 4, Sen. Susan Collins, R-Maine, said that the economic package would win bipartisan support if it is narrowly targeted to provisions that stimulate the economy and create jobs. She criticized the House-passed legislation, saying it was tantamount to an omnibus spending bill. Collins added that she gave President Obama a list of provisions that she thought should be included in a final bill. They include proposals for "robust" infrastructure projects, investment in energy conservation and tax incentives for small businesses and middle- and low-income families. Collins said she is hopeful that the Senate can put together a package that has bipartisan support by the end of the week. By Jeff Carlson and Paula Cruickshank, CCH News Staff Senate Finance Committee Press Release: Grassley Seeks to Improve Education Tax Incentives in Stimulus Package Senate Finance Committee Press Release: Grassley: CBO Analysis That Shows Stimulus Bill Jobs to Cost as Much as $300,000 Each Congressional Budget Office Letter to Sen. Charles E. Grassley on Senate Amendment to Stimulus Bill Isakson-Lieberman Amendment to HR 1 to Provide a Federal Income Tax Credit for Certain Home Purchases Bond Amendment to Provide $2,000,000,000 from the HOME Program for Investment in the Low Income Housing Tax Credit Projects President Signs SCHIP Bill Funded by Increase in Tobacco Excise Tax President Obama on February 4 signed the Children's Health Insurance Program Reauthorization Act (CHIPRA) (HR 2), which expands health care coverage of uninsured children whose parents earn too much to be eligible for Medicaid but not enough to afford private health insurance. The new law, which reauthorizes the State Children's Health Insurance Program (SCHIP), is funded by a 61-cent increase in the federal excise tax on cigarettes, with proportional increases for other tobacco products, raising approximately $65 billion over 10 years. The reauthorization bill provides health care coverage for an additional 4 million low-income children and lifts the ban on states providing insurance to legal immigrant children. During the White House signing ceremony, the president said the expansion of SCHIP coverage is "a critical first step" in his commitment to provide health care coverage "to every single American." He added, "in a decent society, there are certain obligations that are not subject to trade-offs or negotiation --health care for our children is one of those obligations.". The House passed HR 2 on February 4 by a vote of 290 to 135. The Senate passed CHIPRA by a vote of 66 to 32 on January 29. (TAXDAY, 2009/01/30, C.2). By Paula Cruickshank, CCH News Staff Ways and Means Press Release: House Sends Landmark Children's Health Bill to President's Desk Children's Health Insurance Program Reauthorization Act of 2009, as Amended and Passed by the Senate on January 29, 2009, HR 2 Expenses Related to Storage of Manufactured Homes; Capitalization Required (Load, Inc., CA-9) Expenses that a taxpayer incurred to place manufactured homes on sales lots were not deductible as ordinary and necessary business expenses; instead, they had to be capitalized as inventory costs. The expenses included payments to lease the sales lots, costs to transport homes to the lots, and repairs of model homes damaged while located on the lots. Generally, expenses related to the storage of personal property held for resale are included in inventory. While such expenses may be excluded from inventory if incurred at an on-site storage facility, the exception only applied if the taxpayer's expenses related to property sold "exclusively" to retail customers. Even if the sales lots in question were on-site storage facilities, the taxpayer's expenses were incurred to place manufactured homes on the lots to assist local independent salespersons in selling the homes. Thus, although the taxpayer participated in the sale of the homes from the lots to retail customers, it did not sell the homes exclusively to customers. Instead, the title to the manufactured homes generally passed from the taxpayer to an independent salesperson, who then made the sale to the retail customers. Affirming, per curiam, the Tax Court, 93 TCM 969, Dec. 56, 855(M), TC Memo. 2007-51. LOAD, Inc., CA-9, 2009-1 USTC ¶50,194 Other References: Code Sec. 162 CCH Reference - 2009FED ¶8520.685 Code Sec. 263A CCH Reference - 2009FED ¶13,815.23 Tax Research Consultant CCH Reference - TRC BUSEXP: 9,056.35 Noncompetition Agreement Payment Was Ordinary Income, Not Capital Gain from Sale of Personal Goodwill (Muskat, CA-1) A payment made under a noncompetition agreement was compensation treatable as ordinary income, not proceeds from the sale of the recipient's personal goodwill treatable as a long-term capital gain. The recipient failed to show by "strong proof" that, despite the agreement expressly stating that the payments would be in consideration of the individual's promises not to compete, the payment was, instead, intended to be compensation for personal goodwill. The absence of any reference to the individual's personal goodwill in any of the transaction documents also established that the contracting parties did not intend the payments to serve as de facto compensation for the individual's personal goodwill. Moreover, the taxpayer himself signed the agreement, which was not ambiguous with respect to the allocation of the amount at issue. The couple also could not present at trial, for the first time, a claim seeking a refund of self-employment taxes paid. The district court properly dismissed that claim for lack of subject matter jurisdiction because the couple failed to put the IRS on notice of the basic nature of that theory when filing their administrative refund claim. Raising that issue at trial would have substantially varied the legal theory set forth in the refund claim. Finally, the government was not judicially estopped from taking the position that a taxpayer who failed to exhaust his administrative remedies could not litigate a self-employment tax issue in a refund suit. The IRS's position that payments under the noncompetition agreement were not subject to self-employment tax was not inconsistent with its position in the present litigation. Affirming a DC N.H. decision, 2007-2 USTC ¶50,581. I. Muskat, CA-1, 2009-1 USTC ¶50,195 Other References: Code Sec. 1221 CCH Reference - 2009FED ¶30,422.165 Code Sec. 7422 CCH Reference - 2009FED ¶41,688.136 CCH Reference - 2009FED ¶41,688.19 CCH Reference - 2009FED ¶41,688.496 Tax Research Consultant CCH Reference - TRC SALES: 33,052.05 CCH Reference - TRC SALES: 33,104 CCH Reference - TRC VALUE: 12,102.05 CCH Reference - TRC VALUE: 12,106
State Headlines

Connecticut --Sales and Use Tax: Legislation Introduced That Would Tax Certain Internet Sales Legislation has been introduced that would, if enacted, require the collection of Connecticut sales and use taxes when a retailer makes sales of tangible personal property or services through an independent contractor or other representative provided the retailer has an agreement with a Connecticut resident who directly or indirectly refers potential customers to the retailer for consideration via a link on an Internet Web site or otherwise. The legislation would change the definition of "retailer" to include persons who make such sales provided the cumulative gross receipts from sales by the retailer to in-state customers who are referred to the retailer by all residents with such an agreement is in excess of $5,000 during the preceding four quarterly periods ending on the last day of March, June, September, and December. The measure specifies that such a retailer is presumed to be soliciting business through such independent contractors or representatives. That presumption could be overcome by proof that the resident with whom the retailer has an agreement did not engage in any in-state solicitation on behalf of the retailer that would satisfy the nexus requirement of the U.S. Constitution during such four quarterly periods. If enacted, the legislation would be effective April 1, 2009, and would be applicable to sales that occur on and after that date. The measure has been referred to the Joint Committee on Finance, Revenue, and Bonding. Similar legislation was enacted and unsuccessfully challenged in New York (20090116-S.17 and 20090115-S.18). Similar legislation has also been introduced in Hawaii (TAXDAY, 2009/02/05, S.10) and Minnesota (TAXDAY, 2009/02/02, S.15). Subscribers can view S.B. 806, as introduced. S.B. 806, as introduced by the Connecticut Senate on February 3, 2009 Hawaii --Sales and Use Tax: Bill Proposing to Tax Some Internet Sales Introduced A bill that would tax some Internet sales by expanding the definition of "engaging" in business and creating a rebuttable presumption for Hawaii general excise tax nexus purposes has been introduced in the Hawaii House of Representatives. The proposed bill is similar to New York's so-called "Amazon law," which was recently upheld by a New York state court. (TAXDAY, 2009/01/15, S.18) If enacted as introduced, the bill would provide that "engaging," as used in the general excise tax laws with reference to engaging or continuing in business, would include the sale of tangible personal property or taxable services by a person soliciting business through an independent contractor or other representative if the person entered into an agreement with a Hawaii resident who, for consideration, directly or indirectly referred potential customers to the person by a link on an Internet Web site or by other means. To qualify under this proposed definition, the cumulative gross receipts from sales by the person to customers in Hawaii who were referred to the person by such a resident would have to exceed $10,000 during the preceding four quarterly periods ending on the last day of February, May, August, and November. The presumption created by this provision could be rebutted by proof that the resident with whom the person had an agreement did not engage in any solicitation in Hawaii on behalf of the person that would satisfy the nexus requirement of the U.S. Constitution during the specified quarterly periods. Subscribers can view the introduced bill. H.B. 1405, as introduced in the Hawaii House of Representatives on January 27, 2009 Pennsylvania --Multiple Taxes: Budget Proposal Would Create New Taxes, Raise Tobacco Tax In his budget address, Pennsylvania Gov. Edward G. Rendell proposed holding the line on state corporate and personal income taxes, state sales tax, and all business taxes; authorizing a county sales tax; enacting a tax on natural gas extraction; raising existing tobacco taxes; and enacting a tax on smokeless tobacco. The governor also proposed sweeping changes to the state's school district structure to alleviate pressure on local property taxes and spoke approvingly of some legislative suggestions involving tax changes. Income, Business Taxes The governor noted that the proposed budget does not require a personal income tax increase, and he recommended continuation of the phase-out of the capital stock and franchise tax. Among the "good ideas" from legislators the governor acknowledged were "amendments that close the enormous tax loopholes that exist for companies located outside the state that do business here." Sales and Use Tax Counties would be allowed to impose a local sales tax of up to 1% under the governor's proposal. Cigarette, Tobacco Taxes Among "targeted revenue increases" proposed by the governor was a tax on smokeless tobacco. In addition, a proposal to have the state pay off a "huge" accumulated malpractice debt would rely in part on a "slight increase" in tobacco taxes. Severance Tax The budget also proposes a new tax on natural gas extraction. The tax would be imposed in the same manner as a similar tax in West Virginia. Video Poker The Commonwealth should legalize video poker and tax its proceeds, the governor said. Currently, the illegal industry is thriving and "completely unregulated and untaxed." Municipal Fee The governor called for an assessment on municipalities that rely on the State Police for their local policing needs. School District Consolidation Full-scale consolidation of school districts from the current 500 districts to 100 districts would relieve pressure on local property taxes, the governor said. In addition, the governor proposed establishment of a legislative commission to study how best to "right-size" the districts. Subscribers can view the text of the governor's address. Executive Budget Address, Fiscal Year 2009-2010, Pennsylvania Gov. Edward G. Rendell, February 4, 2009

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