This letter highlights some of the more important tax developments
that have come out during the
second
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.
Individual Mandate to Buy Health
Insurance: In
National Federation of Independent Business v. Sebelius,
, No. 11-393 (U.S. 6/28/12), the U.S. Supreme Court, in a 5-4
opinion, upholds the individual mandate under Affordable Care Act (ACA) as
within Congress's taxing power, stating that the ACA's “requirement that certain
individuals pay a financial penalty for not obtaining health insurance may
reasonably be characterized as a tax.”
Pension Smoothing: As part of the highway
funding bill (MAP-21), effective for plan years beginning after December 31,
2011, the Act amends
§430(h) to revise rules for determining the segment rates under
single-employer plan funding rules by adjusting a segment rate if the rate
determined under the regular rules is outside a specified range of the average
of the segment rates for the preceding 25-year period (“average” segment rates).
The Act also requires additional information to be included in the annual
funding notice that defined benefit plans must provide to participants and
beneficiaries, labor organizations representing such participants or
beneficiaries, and the Pension Benefit Guaranty Corporation.
S Corporation Shareholder Basis: In
Maguire v. Comr.,
T.C. Memo 2012-160 (6/6/12), the U.S. Tax Court held that
shareholders in two related S corporations are not prohibited from receiving a
distribution of assets from one of their S corporations and then contributing
those assets to another of their S corporations in order to increase their bases
in the latter to absorb losses otherwise unavailable due to the basis limitation
of
§1366(d)(1). The fact that the two S corporations had a
synergistic business relationship and were owned by the same shareholders did
not preclude this result because the distributions and contributions actually
occurred. Shortly thereafter, the IRS issued Prop. Regs.
§1.1366-2,
REG-134042-07, 77 Fed. Reg. 34884 (6/11/12), which would clarify
the requirements for increasing basis of indebtedness and to assist S
corporation shareholders in determining with greater certainty whether their
particular arrangement creates basis of indebtedness. The IRS explained that the
proposed regulations would require that loan transactions represent bona fide
indebtedness of the S corporation to the shareholder in order to increase basis
of indebtedness; therefore, an S corporation shareholder would need not
otherwise satisfy the “actual economic outlay” doctrine for purposes of
§1366(d)(1)(B). According to the IRS, the proposed regulations'
key requirement would be that purported indebtedness of the S corporation to a
shareholder must be bona fide indebtedness to the shareholder.
COD Income Under §108: In
Rev. Rul. 2012-14, 2012-24 I.R.B. 1012, the IRS ruled that to
measure a partner's insolvency under
§108(d)(3), each partner treats as a liability the amount of the
partnership's discharged excess nonrecourse debt based on allocation of
cancellation of indebtedness income to the partner under
§704(b).
Earnings and Profits: In
REG-141268-11, 77 Fed. Reg. 22515 (4/16/12), the IRS issued
proposed regulations under
§312 regarding allocation of earnings and profits in tax-free
transfers from one corporation to another. The proposed regulations would
clarify that, except as provided in Regs.
§1.312-10, if property is transferred from one corporation to
another and no gain or loss is recognized, no allocation of the earnings and
profits of the transferor is made to the transferee unless the transfer is
described in
§381(a).
Deferral of Losses on Sale or Exchange of
Property Between Controlled Group: In
T.D. 9583,
77 Fed. Reg. 22480 (4/16/12), the IRS issued final regulations
that provide that to the extent a selling member's loss would be redetermined to
be a noncapital, nondeductible amount under Regs.
§1.1502-13, but is not redetermined under Regs.
§1.267(f)-1(c)(2) (which generally renders the attribute
redetermination rule inapplicable to sales between members of a controlled
group), the selling member's loss continues to be deferred.
UNICAP Avoided Cost Rule: The Federal
Circuit Court of Appeals, in
Dominion Resources Inc. v. U.S., No. 2011-5087 (Fed. Cir.
5/31/12), held that the associated property rule laid out in Regs.
§1.263A-11(e)(1)(ii)(B), as applied to property temporarily
withdrawn from service, is not reasonable interpretation of the avoided cost
rule in
§263A. At issue in the case was the amount of interest Dominion
Resources must capitalize, rather than deduct, from its taxable income as a
result of burner improvements in its power plants.
Defense of Marriage Act Held
Unconstitutional: The First Circuit Court of Appeals, in (
Massachusetts v. HHS, No. 10-2204 (1st Cir. 5/31/12),
held that the Defense of Marriage Act, 1 USC §7, is unconstitutional, that
provisions in the Act, which deny numerous benefits, including tax benefits, to
same-sex couples lawfully married in Massachusetts, impermissibly undercut
choices made by same-sex couples and states in deciding who can be married to
whom. However, the court stayed enforcement of the decision until the Supreme
Court has the opportunity to issue its own ruling on the case, citing the likely
appeal of the First Circuit's holding.
Deduction for Local Lodging Expenses: The
IRS issued proposed regulations,
REG-137589-07, 77 Fed. Reg. 24657 (4/25/12), that would allow
taxpayers to deduct local lodging expenses as ordinary and necessary business
expenses in appropriate circumstances. The proposed regulations would not apply
Regs.
§1.262-1(b)(5) to expenses for local lodging of an employee that
an employer provides to the employee or requires the employee to obtain, if: (1)
the lodging is provided on a temporary basis; (2) the lodging is necessary for
the employee to participate in or be available for a bona fide business meeting
or function of the employer; and (3) the expenses are otherwise deductible by
the employee, or would be deductible if paid by the employee, under
§162(a).
Overstatement of Basis for Extended Statute of
Limitations: The U.S. Supreme Court ruled, in (
U.S. v. Home Concrete & Supply LLC, No. 11-139 (U.S.
4/25/12), that the extended six-year statute of limitations period in
§6501(e) does not apply to overstatement of basis as an
overstatement of basis is not an omission from gross income. The Court's ruling
decides a circuit split in favor of the Fourth and Fifth Circuits versus the
Seventh, Federal, D.C., and Tenth Circuits, which all held that an overstatement
of basis is an omission of gross income triggering the extended six-year statute
of limitations.
Reporting of Interest Paid to Foreigners:
While reporting of interest to foreigners is controversial enough in its own
right, final regulations (
T.D. 9584, 77 Fed. Reg. 23391 (4/19/12)) are particularly
notable in that the regulations will provide the IRS with information that can
be exchanged with foreign authorities under information exchange arrangements to
help the IRS under FATCA. The final rules ostensibly have been “simplified,” by
requiring reporting only when interest is paid to a resident of a country with
which the United States has an information sharing agreement; this in effect
requires financial institutions to parse their customer base to identify
customers to get reports and customers who don't need reports.
Draft Forms W-8: The IRS released draft
Forms W-8 to comply with new FATCA requirements. Separate versions of Form
W-8BEN are proposed for individuals (draft W-8BEN) and entities (draft
W-8BEN-E), the latter of which is now six pages long instead of one. The forms
can be found in the lower right corner of this URL:
http://www.irs.gov/businesses/corporations/article/0,,id=236667,00.html
Inversions: The IRS, in
T.D. 9592, 77 Fed. Reg. 34785 (6/12/12), and
REG-107889-12, 77 Fed. Reg. 34887 (6/12/12), finalized and
proposed regulations governing inversions. The most controversial provision is
one that defines a “substantial business” in a foreign country by objective
tests looking at whether 25% of assets, payroll and income are earned in a
country. Since passing this test excuses a foreign company from the inversion
rules, this is an important test.
Program-Related Investments of Private
Foundations: The IRS issues proposed rules (
REG-144267-11, 77 Fed. Reg. 23429 (4/19/12)) providing guidance
to private foundations on program-related investments. The proposed regulations
provide a series of new examples illustrating investments that qualify as
program-related investments and do not modify existing regulations. Instead,
they provide additional examples that illustrate the application of the existing
regulations, IRS said. The charitable activities illustrated in the new examples
are based on published guidance and on financial structures described in private
letter rulings, IRS said. Aside from private foundations, the proposed
regulations affect foundation managers participating in the making of
program-related investments.
Delay in Basis Reporting of Debt
Instruments: The IRS, in
Notice 2012-34, 2012-21 I.R.B. 937, in response to concerns
about approaching deadlines, states that brokers will have until 2014 to begin
basis reporting on debt instruments and options. The change is in response to
worries voiced by brokers and other interested parties who complained to the IRS
that the proposed effective date of Jan. 1, 2013, did not give them enough time
to build and test the systems required to implement the reporting for debt
instruments and options. The Energy Improvement and Extension Act of 2008
amended the broker reporting rules in
§6045 for certain securities, including debt instruments and
options.
Proving IRS Deficiency Notices: The
Federal Circuit Court of Appeals, in
Welch v. U.S., No. 2011-5090 (Fed. Cir. 5/18/12), lays
out a test for determining whether evidence submitted by the IRS is sufficient
to demonstrate the mailing of a deficiency notice. “Use of the form prescribed
in the Internal Revenue Manual for establishing compliance with the notice of
deficiency mailing requirement — PS Form 3877 — is not a prerequisite to the
government demonstrating mailing of a notice of deficiency, but some
corroborating evidence of both the existence and timely mailing of the notice of
deficiency is required,” explained the Federal Circuit
First-Time Homebuyer Credit: The U.S. Tax
Court, in a case of first impression (
Trugman v. Comr., 138 T.C. No. 22 (5/21/12)), holds that
an individual may not claim the First-Time Homebuyer Credit for a principal
residence purchased through a Subchapter S corporation. The court examined the
term “individual” within the context of
§36, and “read the term ‘individual' in
section 36 to exclude S corporations.” The court stated “S
corporations are not individuals for purposes of
section 36” and the corporations remain freestanding entities
“independently recognizable” from their shareholders.
Substantial Risk of Forfeiture: The IRS,
in
REG-141075-09, 77 Fed. Reg. 31783 (5/30/12), addresses points of
confusion surrounding the “substantial risk of forfeiture” provision under
§83. The proposed rules would, among other clarifications,
provide that a such a risk can be established only through a service condition,
or a condition related to the purpose of the transfer. The general concept of
the provision is that property (such as stock options) is not to be included in
the gross income of a service provider (such as an employee) if there is a risk
that the conditions on which the property transfer are based could fail to
materialize and the property thus forfeited.
Health FSA Salary Reduction Limits: The
IRS, in
Notice 2012-40, 2012-26 I.R.B. 1046, stated that the $2,500
limit on salary reduction contributions to health flexible spending arrangements
set by a provision of the 2010 federal health care law does not apply for plan
years starting before 2013.
Notice 2012-40 fleshes out the details of the $2,500 cap on
salary reduction contributions to cafeteria plan health FSAs under
§125(i). The notice defines the term “taxable year” under
§125(i) as the plan year of a cafeteria plan, a clarification
that employers sponsoring plans with fiscal years not lining up with the
calendar year have been anxiously awaiting.
Fee for Renewing PTIN: The Eleventh
Circuit Court of Appeals held, in
Brannen v. U.S., No. 11-14138 (11th Cir. 6/7/12), that
the Treasury Department has the statutory authority to charge fees for issuing
and renewing preparer tax identification numbers.
Portability of Deceased Spousal Unused Exclusion
Amount: The IRS issued temporary and proposed regulations (
T.D. 9593,
77 Fed. Reg. 36150 (6/18/12);
REG-141832-11, 77 Fed. Reg. 36229 (6/18/12)) providing guidance
on the estate and gift tax applicable exclusion amount and the applicable
requirements for electing portability of a deceased spousal unused exclusion
(DSUE) amount to the surviving spouse. The temporary rules also provide guidance
on the applicable rules for the surviving spouse's use of the DSUE amount. The
portability rules affect married spouses where the death of the first spouse
occurs on or after Jan. 1, 2011.
If you have any concerns about how any of these new development would affect you, contact the Tax Lawyers at Marini & Associates, P.A.
for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).
