Some of the more important tax developments that have come
out during the first three months of 2012. Most are documents from the Internal
Revenue Service, but some are important cases and legislative changes you might
want to be aware of for you or your business.
Payroll
Tax Cut Full-Year Extension: On February 22, President Obama
signed into law the Middle Class Tax Relief and Job Creation Act of 2012,
extending the payroll tax cut for the remainder of 2012. The legislation
maintains the FICA payroll tax rate for employees at the 4.2% rate that has
been in place since January 2011, rather than the historical rate of 6.2%. Note
that unless Congress decides to extend the lower rate again, the 4.2% rate
expires December 31, 2012. The extension does not affect the 10.4% SECA rate,
as that was already in place through 2012.
Repeal of
Special Corporate Estimated Tax Payment Rules: The
Middle Class Tax Relief and Job Creation Act of 2012, enacted Feb. 22, repealed
the special estimated tax payment rules for corporations with assets of at
least $1 billion (determined as of the end of the preceding taxable year) that
would have impacted payments due in July, August or September 2012, 2014, 2015,
2016 and 2019, respectively. The changes were made over numerous pieces of
legislation that increased the required payments. Thus, such corporations
should determine their estimated tax payment as if the special rules had never
been enacted.
Splitter
Regulations: On February 14, the IRS published in the Federal Register
foreign tax credit regulations concerning who is the taxpayer who may claim the
credit when the foreign law differs from the U.S. law in viewing the entity
with the right to the income as fiscally transparent (i.e., merely a
representative of its owners or members) or as a required member of a combined
income regime (such as in the case of a disregarded entity or a consolidated
income group). The new rules generally
retain the long-standing legal liability standard, but provide that the credit
is to follow the income in many of these situations regardless of who pays the
tax or has the tax obligation. On the
same day, the IRS published temporary regulations under a statutory change in
2010 designed to prevent taxpayers from splitting the foreign income from the
creditable foreign taxes so as to claim the latter and defer the former. The rules for these cases generally suspend
the credit until the income is recognized for U.S. purposes.
FATCA
Proposed Regulations: FATCA, which was part of the 2010 HIRE Act, enacted chapter 4 (§
§ 1471- 1474), which in turn imposes 30% withholding on “withholdable
payments”to foreign financial entities (FFIs) and certain nonfinancial foreign
entities (NFFEs) unless they report U.S. account owner information to the
IRS. Withholdable payments are basically
fixed or determinable annual or periodic (FDAP) gains and the gross proceeds of
the sale or disposition of FDAP income-producing assets. With the issuance of
the proposed regulations on February 8, there is no longer any doubt that the
objective of FATCA is information reporting, not withholding —withholding is
simply the “incentive” to report.
In
general, the proposed regulations, which build on earlier preliminary guidance
aim to reduce FATCA's compliance burden and to provide (through transitional
rules) ample time for affected entities
to comply with chapter 4. The proposed regulations establish a timetable for
implementation(including grandfathered treatment for pre-existing obligations),
exempt many classes of entities that would otherwise be subject to FATCA, set
out payee/beneficial owner identification and documentation procedures, and
provide FFI due diligence procedures.
The proposed regulations also signal the IRS's intention to coordinate
chapter 3 (§ § 1441-1446) and chapter 4 so as to avoid duplicate reporting.
The same
day that the proposed regulations were issued, Treasury issued a joint
statement with five countries (the UK, France, Italy, Spain, and Germany). The joint statement would introduce a
framework that would let banks send information on their U.S. accounts to their
own governments, which then would share the information with the IRS. The
framework would not provide country-by-country blanket exemptions;rather, it
would provide an alternative mode of FATCA compliance by adjusting local (i.e.,
foreign) law restrictions to allow for the automatic exchange of information
between and/or among participating governments. (It's not yet clear if the
framework would be implemented multilaterally or bilaterally.)
Offshore
Voluntary Disclosure Initiative: On January 16, the IRS announced
that it is reopening its special program to allow taxpayers to disclose their
offshore assets to the government for a third time. According to the IRS, the
program will be open for an indefinite period until otherwise announced. A few
key differences in this program from 2011, include its open-ended structure and
a slightly higher top penalty of 27.5%, up from 25%. But the program does
retain a feature that allows some smaller taxpayers to be eligible for a 5%
penalty or a 12.5% penalty. To participate, taxpayers must file all original
and amended tax returns and include payment for back taxes and interest for up
to eight years, as well as paying accuracy-related and/or delinquency
penalties.
Foreign
Financial Accounts Reporting: Beginning in 2012, virtually
every U.S. individual (including residents, certain nonresident aliens, among
others) who files a federal return for the year and had an interest in an
applicable account/asset valued over $50,000 on the last day of the year or
$75,000 at any point during the year, must file Form 8938, Statement of
Specified Foreign Financial Assets. Reporting thresholds vary based on
filing status. The form must be filed annually.
Proposed
Withdrawal of 2007 Coordinated Issue
Paper on Cost Sharing: On January 19, IRS Transfer Pricing Director
Sam Maruca, who has said in the past that coordinated issue papers are not the
best way to disseminate guidance to the field, announced the proposed
withdrawal of a 2007 coordinated issue paper (CIP) on cost sharing. Maruca said
the CIP illustrates the hazards of trying to develop a blueprint for transfer
pricing cases. “It has been very risky—indeed, has backfired on us—to think we
can issue blanket advice in this area,” he said. Following the release of the
paper in September 2007, practitioners complained that it was an attempt to
retroactively apply the income method, which was not introduced until 2005,
when the IRS issued its proposed cost sharing regulations. The issue paper
warned auditors to be skeptical of taxpayer attempts to apply the comparable
uncontrolled price and residual profit split methods to cost sharing
transactions, saying the “discounted cash flow”—an unspecified method in the
1996 regulations, renamed the income method in the proposed regulations—likely
was more appropriate.
Merger of
the IRS's Advance Pricing Agreement and Competent Authority Functions. Maruca
said the new Advance Pricing and Mutual Agreement Program was up and running
February 27. The new structure puts an end to the handoff between the APA
Program and the U.S. Competent Authority in bilateral cases, which represent
the majority of APAs. Under the old structure, the APA Program, working with
the taxpayer, developed a negotiating position in a case and submitted it to
Competent Authority, which then undertook the negotiations with the foreign
authorities. Now, the same individual will be responsible for both developing
and negotiating the position. This is the structure employed by most U.S.
trading partners.
Final
Rules, Sample Language for Health Plan Summary Benefit Disclosures: Under
the Public Health Service Act (PHSA) § 2715, group health plans and health
insurance issuers that offer group or individual health insurance coverage must
provide a summary of benefits and coverage(SBC), as well as a uniform glossary
of insurance-related and medical terms, to the individuals they cover. The IRS,
HHS and EBSA, who all share rule-making authority under PHSA, issued final
regulations that change some of the content requirements that were included in
the proposed regulations issued in August 2011. Specifically, the IRS
eliminated provisions that would have required premiums (or cost of coverage
information for self-insured plans) to be included in SBCs. The IRS indicated
that premium information may be too complex to be conveyed in an SBC and is not
required by statute. The IRS also modified the final regulations to require
SBCs to include an internet address where an individual may review the uniform
glossary, a contact phone number to obtain a paper copy of the uniform
glossary, and a disclosure that paper copies of the uniform glossary are
available. The final regulations apply for disclosures to participants and
beneficiaries who enroll or re-enroll in group health coverage through an open
enrollment period (including re-enrollees and late enrollees) beginning on the
first day of the first open enrollment period that begins on or after September
23, 2012. For disclosures to participants and beneficiaries who enroll other
than through an open enrollment period (including individuals who are newly
eligible for coverage and special enrollees), the final regulations apply
beginning on the first day of the first plan year that begins on or after
September 23, 2012. For disclosures to plans, and to individuals and dependents
in the individual market, the regulations apply to health insurance issuers
beginning on September 23, 2012.
Final
Rules on ERISA 408(b)(2) Service-Provider Disclosure: Under final
rules issued by the Department of Labor's Employment Benefits Security
Administration February 3, covered service providers to ERISA-covered defined
benefit and defined contribution plans must provide to plan fiduciaries the
information required to: (1) assess reasonableness of the total compensation,
both direct and indirect, that a covered service provider receives from the
contract; (2) identify potential conflicts of interest; and (3) satisfy
reporting and disclosure requirements under Title I of ERISA. “Covered service
providers” include ERISA fiduciary service providers, investment advisers
registered under federal or state law, brokers, and recordkeepers. The rule only applies to service providers
that reasonably expect to earn $1,000 or more in total compensation under a
service contract. The rule does not
apply to simplified employee pension plans, savings investment match plans for
employees of small employers, individual retirement accounts, certain § 403(b) annuity contracts and custodial
accounts, or employee welfare plans.
Business
Automobile Depreciation Limits: In Rev. Proc. 2012-23, the IRS
provided inflation-adjusted automobile (including trucks and vans) depreciation
deduction limitations and automobile (including trucks and vans) lessee
inclusion amounts for 2012, including automobiles, cars and trucks eligible for
first-year additional depreciation.
Deduction
for Mortgage Interest: In an IRS Chief Counsel Memorandum, CCA
201201017, the IRS advised that any reasonable method, including the exact and
simplified methods described in temporary regulations to § 163, the method
provided in Publication 936, Home Mortgage Interest Deduction, or a
reasonable approximation of those methods, may be used until final regulations
are issued specifically addressing allocations of interest on part of
acquisition and/or home equity indebtedness that exceeds qualified residence
interest limitations. In Sophy v. Comr., the U.S. Tax Court held that
unmarried taxpayers who owned homes in California as joint tenants may not
deduct more than a proportionate share of interest on $1 million of acquisition
indebtedness and $100,000 in home equity indebtedness. The Tax Court determined
that the debt must be determined per residence rather than per taxpayer. In the
case, two unmarried taxpayers owned two homes with mortgages totalling more
than $2.2 million. The each attempted to take an interest deduction on $1.1
million of debt per person.
Electronic
Filing of Schedules K-1: Certain entities, such as partnerships, are
required to annually file a Schedule K-1, Partner's Share of Income,
Deductions, Credits, etc., with the IRS and provide a copy to their
partners. In Rev. Proc. 2012-17, the IRS set forth procedures under which a
partnership (including an electing large partnership, as defined in § 775) that furnishes Schedules K-1 (Form
1065) to its partners electronically will be treated as satisfying the
requirements of § 6031(b). Prior to the issuance of the new revenue procedure,
there was no specific guidance as to whether the furnishing of Schedules K-1
electronically met these requirements.
Partnerships must receive the partner's consent before providing the K-1
electronically, rather than on paper.
S
Corporation Dividends: In David
E. Watson PC v. U.S., the Eighth Circuit Court of Appeals, in an issue of
first impression, held that some of the purported dividend payments that an S
corporation made to it's sole shareholder constituted wages subject to FICA.
The court determined that the characterization of funds distributed by an S
corporation to its shareholder-employees turns on an analysis of whether the
payments were made as compensation for service, not on the intent of the
corporation in making the payments. The court explained that while the concept
of “reasonable compensation”is generally applied to the realm of income taxes,
the concept is equally applicable to FICA tax cases.
Extension
of Deadline to Make Portability Election: Section 2010(c) allows the estate of a
decedent who is survived by a spouse to make a portability election to permit
the surviving spouse to apply the decedent's unused exclusion to the surviving
spouse's own transfers during life and at death. The portability election may
be made only by the estates of decedents dying after December 31, 2010. Section 6075(a) makes the due date for filing
an estate tax return nine months after the date of the decedent's death. Section 6081(a) provides that IRS may grant a
reasonable extension of time for filing any return and that, except in the case
of taxpayers who are abroad, no such extension may be for more than six months.
In Notice 2011-82, the IRS provided procedures to make the portability
election. For estates of decedents dying in early 2011 that had missed the due
date for filing Form 706 and Form 4768, the IRS granted, for the purpose of
make a portability election pursuant to § 2010(c)(5)(A), a six-month extension
of time for filing Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return. In Notice 2012-21, the IRS stated that the extension
applies when the executor of a qualifying estate did not file a Form 4768, Application
for Extension of Time To File a Return and/or Pay U.S. Estate (and
Generation-Skipping Transfer) Taxes, within nine months after the
decedent's date of death, and therefore the estate did not receive the benefit
of the automatic six-month extension. A qualifying estate is an estate:(1) the
decedent is survived by a spouse; (2) the decedent's date of death is after
December 31, 2010, and before July 1, 2011; and(3) the fair market value of the
decedent's gross estate does not exceed $5,000,000.
Please do
not hesitate to contact Marini & Associates, P.A. if you have any concerns about how any of these new
developments affect you.
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