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August 11, 2009

Federal Headlines

Procedures for Requesting Change in Supporting Organization's Public Charity Status Issued (Ann. 2009-62)

 

The IRS has issued procedures that allow a supporting organization under Code Sec. 509(a)(3) to request a change in its public charity classification to a public charity classification under Code Sec. 509(a)(1) and Code Sec. 170(b)(1)(A)(vi) or Code Sec. 509(a)(2) (i.e., churches, schools, hospitals and charities that receive public support). An organization may want to change its status as a result of changes made by the Pension Protection Act of 2006 (P.L. 109-280). Specifically, supporting organizations are not eligible to receive IRA distributions under the provision that allows for such distributions without an inclusion in gross income. Additionally, private foundations are restricted from making distributions to supporting organizations.

 

The procedures for requesting a change in public charity classification are consistent with recently issued temporary and proposed regulations that implement the redesign of the Form 990, Return of Organization Exempt from Income Tax. A request for reclassification must made under the rules of Rev. Proc. 2009-4, I.R.B. 2009-1, 118. The request must include a number of specific items and it must be signed under the penalties for perjury by the organization's officer, director, trustee or other authorized official. There is no user fee for the determination letter.

 

Formerly, requests for reclassification were made under Announcement 2006-93, 2006-1 CB 1017 and were processed by the IRS on an expedited basis. Requests submitted under Announcement 2006-93 will be processed, although the announcement is now superseded.

Announcement 2009-62, 2009FED ¶46,442

Other References:

 

Code Sec. 509

 

CCH Reference - 2009FED ¶22,812.50

 

Tax Research Consultant

 

CCH Reference - TRC RETIRE: 66,514

CCH Reference - TRC EXEMPT: 21,202

CCH Reference - TRC EXEMPT: 21,210

 

Deficiency Notice Recharacterizing Individual Partner's CRAT Distribution as Capital Gain Prior to Tax Court's Final Decision in Partnership-Level Proceeding Was Invalid (Miller, TCM)

 

A deficiency notice issued to an individual partner that recharacterized over $200 million in charitable remainder annuity trust (CRAT) distributions as capital gain income, rather than a return of corpus was invalid because it adjusted affected items that could not be litigated until the Tax Court issued a final decision in the related ongoing partnership-level proceeding. The IRS's motion to dismiss for lack of jurisdiction was, therefore, granted.

 

The taxpayer transferred stock to a limited partnership in exchange for a 99-percent limited partnership interest and a .6-percent general partnership interest. The 99-percent limited partnership interest was transferred to a CRAT formed by the taxpayer.. The taxpayer was entitled to monthly distributions as the term beneficiary until the CRAT terminated approximately two years later. The day after forming the CRAT, the partnership entered into a variable forward purchase contract with an investment banking firm, which paid the partnership $198 million for the stock upon execution of the contract although the stated purchase date of the sale was approximately two years later. The CRAT's monthly distributions were reported by the taxpayer as nontaxable return of corpus.

 

The IRS determined in its final partnership administrative adjustment (FPAA) that the partnership made a closed and complete sale of the stock when it executed the variable prepaid forward contract and, therefore, pursuant to Code Sec. 664, had approximately $214 million in long-term capital gain, measured by the difference between the $198 million in cash received, plus the contingent right to future appreciation less the partnership's basis in the stock. The tax matters partner immediately filed a petition with the Tax Court which is currently pending. The IRS, however, issued a deficiency notice to the taxpayer on the same day it issued its FPAA. The deficiency notice, which the IRS's motion in this case sought to declare invalid, alleged that the CRAT anti-abuse regulation (Reg. §1.643(a)-8) requires the recharacterization of the distributions as capital gain and treats the CRAT as having sold a pro rata portion of the stock in the tax years it made the distributions.

 

According to the court, recharacterization of the CRAT distributions as capital gain under the anti-abuse regulation cited in the notice of deficiency is only possible if the CRAT distributions would otherwise be characterized as corpus in the hands of the taxpayer. The characterization of the distributions as capital gain or a return of capital depended upon a final determination of the partnership gain issue. The deficiency notice, therefore, adjusted affected items that depended upon the outcome of the partnership gain issue in the partnership-level proceeding. Imposition of the accuracy-related penalties also depended upon operation of the anti-abuse regulation and were, therefore, affected items.

S.L. Miller, TC Memo. 2009-182, Dec. 57,901(M)

Other References:

 

Code Sec. 6221

 

CCH Reference - 2009FED ¶37,569.12

 

Code Sec. 6231

 

CCH Reference - 2009FED ¶37,849.45

 

Tax Research Consultant

 

CCH Reference - TRC PART: 60,056

 

State Headlines

Hawaii --Corporate, Personal Income Taxes: Voluntary Disclosure Program for Undeclared Offshore Account Income Announced

 

The Hawaii Department of Taxation has issued a Tax Information Release (TIR) announcing a concurrent voluntary disclosure program for corporate and personal income taxpayers participating in the current Internal Revenue Service (IRS) voluntary disclosure program for undeclared offshore bank account income.

 

In March 2009, the IRS announced guidelines for taxpayers making voluntary disclosures of unreported income generated through undeclared offshore bank accounts located in countries outside the United States. The IRS encouraged taxpayers with undisclosed foreign accounts or entities to make a voluntary disclosure to avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. In furtherance of the IRS's efforts, the Department of Taxation is likewise encouraging taxpayers with Hawaii income sourced from undeclared foreign bank accounts to make a voluntary disclosure with the state. Any person submitting a voluntary disclosure with the state pursuant to the TIR will generally not be referred for criminal prosecution or be assessed any civil penalties on any timely and complete submissions. In order for a voluntary disclosure with the state to be timely, the taxpayer must make a timely voluntary disclosure with the IRS pursuant to its offshore undeclared bank account voluntary disclosure guidelines and must make contact with the department's Offshore Voluntary Disclosure Coordinator by the same deadline. As of the date of issuance of the TIR, the deadline for submissions is September 23, 2009.

 

Any taxpayer making a voluntary disclosure of undeclared offshore bank account income pursuant to the IRS guidelines that would like to also make a voluntary disclosure with the state should initiate contact with the Department of Taxation by contacting the Offshore Voluntary Disclosure Coordinator at (808) 587-1603 in order to determine whether the taxpayer is eligible for the Hawaii voluntary disclosure program. The coordinator will request the identity of the taxpayer and determine whether the taxpayer is under civil examination or criminal investigation. Persons under civil examination or criminal investigation are not eligible to participate in the Hawaii program; all other taxpayers are eligible. Taxpayers eligible for the Hawaii program must submit the following: a cover letter identifying the taxpayer and the taxpayer's representative and also stating that the voluntary disclosure is being made to resolve unreported offshore Hawaii taxable income pursuant to the TIR and IRS guidelines and that none of the unreported offshore taxable income being reported is illegal source income; a copy of the voluntary disclosure package submitted to the IRS; amended returns for any taxable year for which the statute of limitations remains open, with the marking "OFFSHORE VOLUNTARY DISCLOSURE" on the top of the first page of the return; and full payment of tax and interest due and payable at the time of the submission.

 

Beginning October 1, 2009, any taxpayer subsequently audited by the Department of Taxation (or by the IRS where the IRS adjusts for unreported foreign bank account income) that includes adjustments to Hawaii taxable income due to unreported foreign bank account income will be subject to all civil penalties available by law, including the 50% civil fraud, 25% negligence, and 20% substantial understatement penalties. Furthermore, pursuant to Act 166, Laws 2009, taxpayers found to have unreported income from foreign bank accounts will be assessed unpaid taxes and penalties on up to six taxable years where unreported income constitutes 25% or more of the amount stated on a return. Also, the likelihood of referral for criminal investigation increases for those taxpayers that fail to submit a voluntary disclosure and are later selected for examination.

 

Persons needing additional information regarding this TIR may contact the Department of Taxation at (808) 587-1577.

Tax Information Release No. 2009-03, Hawaii Department of Taxation, August 6, 2009, ¶200-757

 

Other References:

 

Explanations at ¶89-186

Wisconsin --Corporate Income Tax: Emergency Rules Adopted on Combined Reporting

 

The Wisconsin Department of Revenue has adopted rules on an emergency basis to implement combined reporting under the corporation franchise and income taxes. The rules, which interpret Wis. Stat. Sec. 71.255, address numerous topics, including the following:

 

-- applicable definitions;

 

-- who must use combined reporting;

 

-- determining whether a corporation is a member of a commonly controlled group;

 

-- water's edge rules;

 

-- computation and apportionment of combined unitary income;

 

-- application of net business loss carryforwards and credits;

 

-- the unitary business concept;

 

-- the controlled group election;

 

-- alternative apportionment;

 

-- designated agents;

 

-- combined estimated tax payments; and

 

-- combined return requirements.

 

 

 

Rule Secs. Tax 2.60 --Tax 2.67, Wisconsin Department of Revenue, effective August 8, 2009

 
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