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August 14, 2009

Federal Headlines

IRS Establishes Qualifying Advanced Energy Project Program (TDNR TG-262; Notice 2009-72)

 

The IRS has established a qualifying advanced energy project program under Code Sec. 48C. The IRS has also announced an initial allocation round of the advanced energy project credit under the program. The program serves to encourage taxpayers to establish, expand or re-equip manufacturing facilities for the production of certain energy-related property.

Treasury Department News Release, TDNR TG-262, 2009FED ¶46,447

Notice 2009-72, 2009FED ¶46,448

Other References:

 

Code Sec. 48C

 

CCH Reference - 2009FED ¶4695.01

 

Tax Research Consultant

 

CCH Reference - TRC BUSEXP: 51,804

Six-Year Statute of Limitations Applicable Where Foreign Currency Transactions Netted Inappropriately as Part of Larger Tax Shelter (Highwood, TC)

 

In a tax shelter case stemming from a John Doe summons issued to a law firm in 2003, the six-year statute of limitations for substantial omissions from gross income under Code Sec. 6501(e) was applied to a partnership return. The partners in the partnership had increased their basis in the partnership with premiums paid on a long position in a foreign currency option without reducing their basis for premiums received from a related and partially offsetting short foreign currency option.

 

This increased basis was then transferred to stock distributed to the partners under the carry-over basis rules of Code Sec. 732(b). The high-basis stock was then sold for a large capital loss.

 

In attacking the transaction, the IRS applied the extended six-year statute of limitations by virtue of the partners' incorrect accounting for the offsetting foreign currency positions. The foreign currency options were subject to Code Sec. 988 because they were denominated in Japanese yen, a nonfunctional currency. Under Reg. §1.988-1(e), each transaction subject to Code Sec. 988 must be reported and accounted for separately.

 

The taxpayers violated this rule by netting the amounts paid and received on the two contracts. The taxpayer's argument that the two contracts were a single transactions due to similar terms was rejected as the long and short options were priced separately and payment on the contracts was determined separately. Failure to report gain and loss on the individual transactions resulted in a substantial omission of gross income and, thus, Code Sec. 6501(e) was applicable.

 

However, the IRS motion for summary judgment that the foreign options, and the overall transaction, were shams was denied as it contradicted the Service's argument that the options were subject to Code Sec. 988. Nonetheless, the court refused to state that the a 6-year period of limitations would not apply if the IRS's sham theory were eventually upheld, only that it was not deciding that question in the context of a motion for summary judgment.

 

Furthermore, the IRS position in the final partnership administrative adjustment (FPAA) that the foreign currency transactions should be disregarded did not preclude application of the extended statute of limitations even though disregarded transactions cannot create omitted income. The failure to raise the issue of omitted income under Code Sec. 988 on the FPAA did not prevent the court from addressing the issue. In addition, the IRS's alternative argument - that the two options should be combined as one transaction, thus limiting the increase to the partners' basis to the net amount of the two options - was not a concession on the part of IRS that no income was omitted.

 

Finally, the partners' reporting of the net loss from the offsetting foreign options on their individual returns was not adequate disclosure for purposes of avoiding the finding of omitted income under Code Sec. 6501(e)(1)(A)(ii).

Highwood Partners, 133 TC No. 1, Dec. 57,904

Other References:

 

Code Sec. 988

 

CCH Reference - 2009FED ¶28,907.021

 

CCH Reference - 2009FED ¶28,907.022

 

CCH Reference - 2009FED ¶28,907.026

 

Code Sec. 6501

 

CCH Reference - 2009FED ¶38,971.55

 

CCH Reference - 2009FED ¶38,971.76

 

Tax Research Consultant

 

CCH Reference - TRC PART: 60,352.10

CCH Reference -

TRC INTL: 3,462

CCH Reference - TRC INTLOUT: 21,100

 
 

State Headlines

All States --Sales and Use Tax: SST Panel Rejects States' Origin-Sourcing Interpretation

 

A Streamlined Sales Tax (SST) panel rejected an interpretation sought by seven states that would have held the January 1, 2010, effective date in the SST Agreement for an origin-sourcing option is a "trigger," rather than a "sunset." (TAXDAY, 2009/08/04, S. 1) By a vote of 3-2, with one member absent, the Compliance Review and Interpretations Committee (CRIC) rejected the interpretation sought by Arizona, New Mexico, Ohio, Tennessee, Texas, Utah, Virginia, and the Virginia Association of Counties. SST Executive Director Scott Peterson told the CRIC members that, having rejected the requested interpretation, they must now explain in writing how they think the relevant provision should be interpreted and hold another vote on that alternative interpretation. The CRIC deferred any further action until their next meeting.

 

Background: In an attempt to resolve a long-running controversy, the SST Governing Board amended the Agreement in December 2007 to allow states to qualify for full membership under an origin-sourcing option, effective "on or after January 1, 2010, provided that at least five states which are not full member states on December 31, 2007" make the election to use origin sourcing and are otherwise in substantial compliance with the Agreement. It is now apparent there will not be five states in that position on January 1, 2010.

 

In response to questions about how to interpret the effective-date language, the seven states and the Virginia Association of Counties sought an interpretation holding that January 1, 2010, is the earliest date on which qualifying states can become full members (i.e. a "trigger") and not a deadline. Opponents of this interpretation, from the Business Advisory Council (BAC) and, apparently, among some existing member states, take the position that January 1, 2010, was intended as a deadline (i.e. a "sunset"), and that the origin-sourcing option will not be available after that date unless the board further amends the Agreement.

 

During a sometimes heated debate, BAC representatives argued that it was inappropriate for the CRIC to take this matter up now, given the expectation that the board will be debating this issue at its annual meeting in September in Oklahoma City. Supporters of hearing the matter responded that the CRIC is supposed to vet such interpretations and that any action it takes does not bind the board. Ultimately, although the CRIC did hold a vote, the requested interpretation was rejected.

 

Other action: The CRIC took three other votes during their conference call.

 

-- The CRIC voted 4-2 to approve an interpretation sought by Loren Chumley, KPMG, that the value of points, awarded employees as sales incentives and redeemable for merchandise at a reduced price, should be treated as a discount and excluded from the sales price of the merchandise.

 

-- The CRIC voted 5-0 not to accept a request to issue an interpretation sought by Denton Childs, Tyson Foods, Inc., related to how Arkansas amended its laws to impose use tax on services in order to conform to the Agreement's destination-based sourcing requirements. The CRIC members had reservations about how the request was drafted, and questions about exactly what they were being asked to determine.

 

-- The CRIC voted 5-0 to accept a request to issue an interpretation sought by James Tilton, Alex Lee, Inc., on whether Lucky Charms cereal should be taxed as "candy" because it "bundles" marshmallows (which fit the Agreement's definition of "candy") with oat pieces that contain flour (the presence of which excludes these pieces from the "candy" definition).

 

Peterson told the CRIC that his office has begun the process for the annual recertification of member states. He hopes to have completed the process for some states in time for the CRIC to begin its review at its next meeting in two weeks. At that time, Peterson also hopes to have prepared a schedule for the annual review process.

Meeting, Compliance Review and Interpretations Committee, August 13, 2009

Oregon --Multiple Taxes: Credit Sunset Dates Amended, Enacted

 

Almost every Oregon corporate excise (income), personal income, and insurance gross premiums tax credit has either had its sunset date amended or a sunset date has been added for the first time. In some cases the sunset dates have been extended, but in some cases they have been shortened. All the credits affected by the new law will sunset either after 2011, 2013, or 2015. Most of the credits will sunset after 2011. In addition, any tax credits enacted after 2009, will apply for a maximum of six years beginning with the initial tax year for which the credit is applicable, unless the Legislature expressly provides otherwise.

H.B. 2067, Laws 2009, effective January 1, 2010
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