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April 17, 2009

Federal Headlines

Phase Out of Tax Credit for Ford Hybrids Begins (Notice 2009-37)

 

The IRS has announced the credit phase out schedule for advanced lean burn technology motor vehicles and hybrid passenger automobiles and light trucks manufactured by the Ford Motor Company that are purchased for use or lease in the United States beginning on April 1, 2009. Taxpayers may claim the full amount of the credit only on purchases made prior to that date because the total number of vehicles sold reached the 60,000 vehicle threshold in the last quarter of 2008.

 

For vehicles purchased for use or lease on or after April 1, 2009, and on or before Sept. 30, 2009, the credit is 50 percent of the allowable amount under Code Sec. 30B. For vehicles purchased for use or lease on or after Oct. 1, 2009, and on or before March 31, 2010, the credit is 25 percent of the allowable amount. For vehicles purchased for use or lease on or after April 1, 2010, no credit is allowable.

IR-2009-42,

2009FED ¶46,340

Notice 2009-37, 2009FED ¶46,341

Other References:

 

Code Sec. 30B

 

CCH Reference - 2009FED ¶4059E.025

 

CCH Reference - 2009FED ¶4059E.10

 

CCH Reference - 2009FED ¶4059E.20

 

Tax Research Consultant

 

CCH Reference - TRC INDIV: 57,706

IRS Provides Guidance Regarding Differential Wage Payment Withholding for Employees on Active Military Duty (Rev. Rul. 2009-11)

 

The IRS has provided guidance regarding differential wage payments that employers voluntarily make to employees who are on active military service. The payments are intended to make up at least part of the gap between what the employees would make as employees, and what they receive as military pay.

 

The guidance explains that differential wage payments made to an individual while on active duty in the United States uniformed services for more than 30 days are subject to income tax withholding, but are not subject to Federal Insurance Contributions Act (FICA) or Federal Unemployment Tax Act (FUTA) taxes. The amounts of the differential wage payments must be reported by the employer on the employee's Form W-2. Previously, the IRS had concluded that differential wages were not subject to income tax withholding.

 

Since the differential wages qualify as supplemental wages, employers may use one of two methods to calculate income tax withholding on differential wage payments to an employee who receives no more than $1 million in total supplemental wages from the employer during the calendar year. Under the aggregate procedure, the employer adds the differential wage payment to the employee's regular wages, if any, for the payroll period and treats the aggregate of the two as if it constituted a single wage payment for the payroll period. The employer then calculates withholding from the differential wages in the same way it does for regular wage payments, according to the employee's Form W-4. Alternatively, the employer may use optional flat rate withholding, if the differential wage payment is not paid concurrently with regular wages or is separately stated on the employer's payroll records, and income tax was withheld from the employee's regular wages during the calendar year or the preceding calendar year. The current flat withholding rate for 2009 is 25 percent, but this could change. Finally, if the employer pays the employee more than $1 million in total supplemental wages during the calendar year, the withholding rate is the highest rate applicable (currently 35 percent).

 

Rev. Rul. 69-136, 1969-1 C.B. 252, is modified and superseded.

Rev. Rul. 2009-11, 2009FED ¶46,342

Other References:

 

Code Sec. 3401

 

CCH Reference - 2009FED ¶33,506.195

 

Tax Research Consultant

 

CCH Reference - TRC PAYROLL: 6,058

Prior Tax-Evasion Conviction Estops Taxpayer from Denying Civil Fraud; Extended Limitations Period Applied (Williams, III, TCM)

 

The statute of limitations on assessment remained open indefinitely and the Code Sec. 6663(a) fraud penalty could be imposed on an individual who had previously pled guilty to tax evasion for the same tax years. Although the taxpayer maintained that his prior tax-evasion plea meant only that he committed evasion at some point, and not necessarily in each of the years for which he entered the plea, his allocution at the time his plea was entered acknowledged tax evasion in all of the years.

 

Before the penalty could be imposed, it was necessary to determine whether the normal three-year statute of limitations on assessment under Code Sec. 6501(a) applied, or whether an assessment could be made at any time under Code Sec. 6501(c)(1) because the taxpayer filed false or fraudulent returns. The taxpayer's prior criminal conviction collaterally estopped the taxpayer from relitigating the issue of whether he fraudulently underpaid his income taxes in each of the years for which he entered a guilty plea.

J.B. Williams, III, TC Memo. 2009-81, Dec. 57,791(M)

Other References:

 

Code Sec. 6501

 

CCH Reference - 2009FED ¶38,967.283

 

Code Sec. 6663

 

CCH Reference - 2009FED ¶39,658.40

 

Tax Research Consultant

 

CCH Reference - TRC IRS: 27,200

CCH Reference - TRC PENALTY: 6,162

 
 

State Headlines
 

California --Corporate Income Tax: Commodity Futures Sales Included in Sales Factor Gross Receipts

 

A California court of appeal ruled that commodity futures sales that were made to hedge against price fluctuations in the agricultural materials used in a cereal company's manufacturing operations should be included in the taxpayer's corporation franchise and income tax apportionment formula's sales factor for purposes of apportioning the taxpayer's business income to California. The court held that the full sales price of these futures contracts constituted gross receipts includable in the sales factor during the tax years at issue, but remanded the case back to the trial court to determine whether a distortion adjustment under California Revenue & Taxation Code §25137 was appropriate.

 

In so ruling, the court reversed the lower court's decision, which held that the futures contracts had no value and therefore should not be included in the sales factor gross receipts. The appellate court found that the futures sales contracts were legally binding obligations to sell a commodity and that a trader received consideration at offset. The taxpayer either received money or other consideration for goods sold, which were includable in the sales factor gross receipts.

 

The court determined that the hedging transactions were undertaken for the ultimate purpose of obtaining profits and therefore should be included in the apportionment formula's sales factor in order to properly reflect the taxpayer's income producing activities. The Franchise Tax Board (FTB) unsuccessfully argued that the receipts from futures trades should be considered adjustments in the taxpayer's costs of goods rather than sales because the company engaged in hedging as a form of price insurance, not as a profit-making venture. The court reasoned that the hedging transactions were undertaken to smooth out the price fluctuations of the raw goods used by the taxpayer so that the taxpayer could operate profitably despite the price volatility in the agricultural commodities it used to manufacture its consumer products. Although the taxpayer did not make any profit on its futures trades, it would not have been able to achieve its profit margins on its ultimate product sales without the price protection of hedging. Furthermore, the fact that the taxpayer accounted for its trades as adjustments in its costs of goods on its financial statements was irrelevant as it is well settled that a company's financial accounting treatment of the trades is not binding for tax purposes.

 

Finally, under the plain language of the statute, the court found that the taxpayer's gross receipts from the futures sales contract were equivalent to the full sales price of the contract, and not the net gains on futures contracts as the FTB had proposed. However, as the lower court never reached the issue of whether including such gross receipts in the sales factor denominator would result in distorting the percentage of the taxpayer's actual business activity conducted in California, the appellate court remanded this issue back to the trial court for further consideration.

General Mills v. Franchise Tax Board, California Court of Appeal, First Appellate District, No. A120492, April 15, 2009, ¶404-894

 

Other References:

 

Explanations at ¶11-525

Maryland --Sales and Use Tax: SST and Nexus Presumption Bills Died in Committees

 

Legislation that would have directed the Maryland Comptroller to draft legislation needed to bring the state into conformity with the Streamlined Sales and Use Tax (SST) Agreement failed to leave House and Senate committees before the General Assembly's session ended on April 13, 2009. Under current law, SST conformity legislation cannot be introduced unless the U.S. Congress enacts legislation authorizing SST member states to require remote sellers to collect sales tax.

 

The so-called Amazon bill also died in committee. This legislation that would have created a rebuttable presumption of Maryland sales and use tax nexus for certain sellers who enter into agreements with state residents under which the resident, for a commission or other consideration, refers potential customers to the seller through a Web site link or otherwise. The presumption would have applied to sellers whose cumulative gross receipts from sales to Maryland customers referred by residents with such an agreement exceeded $10,000 during the four preceding quarterly periods.

H.B. 337/S.B. 622 and S.B. 1071, failed to pass Maryland General Assembly upon adjournment on April 13, 2009

Missouri --Multiple Taxes: House Passes Proposed Constitutional Amendment to Replace Income Tax With New Sales Tax

 

The Missouri House of Representatives has passed a joint resolution proposing a constitutional amendment that would, subject to voter approval, replace the state individual and corporate income taxes, bank franchise tax, withholding tax, and state sales and use tax with a "fair sales tax" of 5.11% on retail sales of new tangible personal property and taxable services beginning January 1, 2012. If approved, the General Assembly could make one adjustment to the rate after the imposition of the tax to adjust the amount of revenue received to make the tax revenue-neutral and to provide continued funding for programs. A component part or ingredient of a new tangible personal property to be sold at retail, federal government purchases, and business-to-business transactions including agriculture would be exempt from the new sales tax while all other exemptions and tax credits would be eliminated. Any new exemptions would require a two-thirds affirmative vote by the General Assembly and approval by the Governor. The conservation sales tax, the soil and parks sales tax, and local sales taxes would be recalculated to produce substantially the same amount of revenue. Each qualified family would receive a sales tax rebate based on the federal poverty level guidelines to offset the sales tax on basic necessities.

 

Subscribers can view the text of the joint resolution.

 

 

HJR36, as passed the Missouri House of Representatives on April 16, 2009

 
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