Joint Committee Report JCS-2-11: General Explanation of Tax Legislation Enacted in the 111th Congress
JCS-2-11
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APPENDIX: ESTIMATED BUDGET EFFECTS OF TAX LEGISLATION ENACTED IN THE 111TH CONGRESS
[Editor's Note: Estimate Tables not reproduced.]
FOOTNOTES
1 This document may be cited as follows: Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress (JCS-2-11), March 2011.
2 H.R. 2. The bill passed the House on January 14, 2009. The Senate passed the bill with an amendment on January 29, 2009. The House agreed to the Senate amendment on February 4, 2009. The President signed the bill on February 4, 2009. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of the Code Provisions of H.R. 2, the "Children's Health Insurance Program Reauthorization Act of 2009" as Passed by the House of Representatives on January 14, 2009 (JCX 3-09), January 14, 2009).
3 Except where otherwise stated, all section references are to the Internal Revenue Code of 1986, as amended (the "Code").
8 Controlled group is defined in section 1563.
14 Sec. 5721 (inventories); sec. 5722 (reports); sec. 5723 (packaging); sec. 5741 (records).
15 Sec. 5702(c) defines tobacco products as cigars, cigarettes, smokeless tobacco, pipe tobacco, and roll-your-own tobacco.
21 24 C.F.R. sec. 41.81(b) (tobacco products and cigarette papers and tubes); sec. 5061(a) (distilled spirits, wines, and beer).
22 19 U.S.C. sec. 1504(a). The Secretary may extend this period under certain circumstances and with notice to the importer.
23 19 U.S.C. sec. 1514(a), (c)(3).
24 Sec. 5713. A "manufacturer of tobacco products" does not include (1) a person who produces tobacco products solely for the person's own personal consumption or use, and (2) a proprietor of a customs bonded manufacturing warehouse with respect to the operation of such warehouse. Sec. 5702(d).
28 Sec. 5006(c)(2) (distilled spirits); sec. 5041(f) (wines); sec. 5054(a)(3) (beer).
31 Sec. 6103(b)(2). Return information is:
32 Sec. 6103(c)-(o). Such exceptions include disclosures by consent of the taxpayer, disclosures to State tax officials, disclosures to the taxpayer and persons having a material interest, disclosures to Committees of Congress, disclosures to the President, disclosures to Federal employees for tax administration purposes, disclosures to Federal employees for nontax criminal law enforcement purposes and to the Government Accountability Office, disclosures for statistical purposes, disclosures for miscellaneous tax administration purposes, disclosures for purposes other than tax administration, disclosures of taxpayer identity information, disclosures to tax administration contractors and disclosures with respect to wagering excise taxes.
33 Title VI of the American Jobs Creation Act of 2004, Pub. L. No. 108-357.
34 U.S. Department of Agriculture, Office of Inspector General, Southeast Region, Report No. 03601-15-At, Audit Report: Tobacco Transition Payment Program Tobacco Assessments Against Tobacco Manufacturers and Importers (September 2008).
36 All the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
37 H.R. 1. The House Committee on Ways and Means reported H.R. 598 on January 27, 2009 (H.R. Rep. No. 111-8). The text of H.R. 598 was added to H.R. 1 at Division B, Title I. H.R. 1 passed the House on January 28, 2009. The Senate Committee on Finance reported S. 350 without a written report on January 29, 2009. The Senate passed H.R. 1 with an amendment incorporating the text of S. 350, as amended, at Division B, Title I on February 10, 2009. The conference report was filed on February 12, 2009 (H.R. Rep. No. 111-16) and was passed by the House on February 13, 2009, and the Senate on February 13, 2009. The President signed the bill on February 17, 2009.
38 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income, plus (2) the amount of the individual's net self-employment earnings.
39 The credit for certain government employees is available for 2009. The credit is $250 ($500 for a joint return where both spouses are eligible individuals). An eligible individual for these purposes is an individual: (1) who receives an amount as a pension or annuity for service performed in the employ of the United States or any State or any instrumentality thereof, which is not considered employment for purposes of Social Security taxes; and (2) who does not receive an economic recovery payment under the Veterans Administration, Railroad Retirement Board, or the Social Security Administration.
40 Possessions with mirror code tax systems are the United States Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.
41 Possessions that do not have mirror code tax systems are Puerto Rico and American Samoa.
42 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income, plus (2) the amount of the individual's net self-employment earnings.
43 A foster child must reside with the taxpayer for the entire taxable year.
44 All income thresholds are indexed for inflation annually.
45 The provision was subsequently amended by section 103 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
46 The $5,000 amount is indexed for inflation in the case of taxable years beginning in 2010.
47 The provision was subsequently amended by section 103 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
48 Sec. 25A. The Hope credit generally may not be claimed against a taxpayer's alternative minimum tax liability. However, the credit may be claimed against a taxpayer's alternative minimum tax liability for taxable years beginning prior to January 1, 2009.
49 The provision was subsequently amended by section 103 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen.
50 A technical correction may be necessary so that the statute reflects this intent. See section 2(a) of H.R. 4169, the "Tax Technical Corrections Act of 2009," introduced December 2, 2009.
51 For purposes of this description, the term "account" is used interchangeably to refer to a prepaid tuition benefit contract or a tuition savings account established pursuant to a qualified tuition program.
52 Section 529 refers to contributors and designated beneficiaries, but does not define or otherwise refer to the term account owner, which is a commonly used term among qualified tuition programs.
53 The provision was subsequently amended by section 742 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
54 This provision was subsequently amended by sections 11 and 12 of the Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, described in Part Five, and by section 2 of the Homebuyer Assistance and Improvement Act of 2010, Pub. L. No. 111-98, described in Part Ten of this document.
57 The State housing credit agency may collect reasonable fees from subaward recipients to cover the expenses of the agency's asset management duties. Alternatively, the State housing credit agency may retain a third party to perform these asset management duties.
58 The rule applicable to the adoption credit and child credit is subject to the EGTRRA sunset.
59 The provision was subsequently amended by sections 201 and 202 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
60 Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules regarding whether an item is deductible under section 162 or instead is subject to capitalization under section 263 or section 263A.
61 However, the additional first-year depreciation deduction is not allowed for purposes of computing earnings and profits.
62 Assume that the cost of the property is not eligible for expensing under section 179.
63 A special rule precludes the additional first-year depreciation deduction for any property that is required to be depreciated under the alternative depreciation system of MACRS.
64 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer.
If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).
65 A special rule applies in the case of certain leased property. In the case of any property that is originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the taxpayer within three months after the date that the property was placed in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback.
If property is originally placed in service by a lessor, such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale.
66 In order for property to qualify for the extended placed in service date, the property is required to have an estimated production period exceeding one year and a cost exceeding $1 million.
67 Property does not fail to qualify for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect prior to January 1, 2008.
68 For purposes of determining the amount of eligible progress expenditures, it is intended that rules similar to sec. 46(d)(3) as in effect prior to the Tax Reform Act of 1986 shall apply.
69 Sec. 168(k)(4). In the case of an electing corporation that is a partner in a partnership, the corporate partner's distributive share of partnership items is determined as if section 168(k) does not apply to any eligible qualified property and the straight line method is used to calculate depreciation of such property.
70 Special rules apply to an applicable partnership.
71 For this purpose, bonus depreciation is the difference between (i) the aggregate amount of depreciation for all eligible qualified property determined if section 168(k)(1) applied using the most accelerated depreciation method (determined without regard to this provision), and shortest life allowable for each property, and (ii) the amount of depreciation that would be determined if section 168(k)(1) did not apply using the same method and life for each property.
72 In the case of passenger aircraft, the written binding contract limitation does not apply.
73 Special rules apply to property manufactured, constructed, or produced by the taxpayer for use by the taxpayer.
74 The additional first year depreciation deduction was subsequently extended for one year generally through 2010 (through 2011 for certain longer-lived and transportation property) by section 2022 of the Small Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part Fourteen. The provision was temporarily expanded and extended generally through 2012 (through 2013 for certain longer-lived and transportation property) by section 401 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
75 The provision allowing a taxpayer to claim certain credits in lieu of bonus depreciation was subsequently modified and extended generally through 2012 by section 401 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
76 In computing the maximum amount, the maximum increase amount for extension property is reduced by bonus depreciation amounts for preceding taxable years only with respect to extension property.
77 Additional section 179 incentives are provided with respect to qualified property meeting applicable requirements that is used by a business in an empowerment zone (sec. 1397A) or a renewal community (sec. 1400J), qualified section 179 Gulf Opportunity Zone property (sec. 1400N(e)), qualified Recovery Assistance property placed in service in the Kansas disaster area, Pub. L. No. 110-234, sec. 15345 (2008), and qualified disaster assistance property (sec. 179(e)).
78 Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election under section 179 without the consent of the Commissioner on an amended Federal tax return for that taxable year. This amended return must be filed within the time prescribed by law for filing an amended return for the taxable year. T.D. 9209, July 12, 2005.
80 The provision was subsequently amended by section 402 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
81 The provision was extended to taxable years beginning after 2009 and before 2011 by section 201 of the Hiring Incentives to Restore Employment Act of 2010, Pub. L. No. 111-147, described in Part Seven. Additionally, the provision was temporarily expanded and extended for taxable years beginning in 2010 and 2011 by section 2021 of the Small Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part Fourteen, and modified and extended for taxable years beginning in 2012 by section 402 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
87 For all elections under this provision, the common parent of a group of corporations filing a consolidated return makes the election, which is binding on all such corporations.
88 The provision was modified and extended by section 13 of the Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, described in Part Five of this document.
89 For this purpose, the gross receipt test of section 448(c) is applied by substituting $15,000,000 for $5,000,000 each place it appears.
90 The welfare-to-work tax credit was consolidated into the work opportunity tax credit in the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, for qualified individuals who begin to work for an employer after December 31, 2006.
91 For further discussion of the Work Opportunity Tax Credit see section 757 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
92 Sec. 383 imposes similar limitations, under regulations, on the use of carryforwards of general business credits, alternative minimum tax credits, foreign tax credits, and net capital loss carryforwards. Sec. 383 generally refers to section 382 for the meanings of its terms, but requires appropriate adjustments to take account of its application to credits and net capital losses.
93 If the loss corporation had a "net unrealized built-in gain" (or NUBIG) at the time of the ownership change, then the section 382 limitation for any taxable year may be increased by the amount of the "recognized built-in gains" (discussed further below) for that year. A NUBIG is defined as the amount by which the fair market value of the assets of the corporation immediately before an ownership change exceeds the aggregate adjusted basis of such assets at such time. However, if the amount of the NUBIG does not exceed the lesser of (i) 15 percent of the fair market value of the corporation's assets or (ii) $10,000,000, then the amount of the NUBIG is treated as zero. Sec. 382(h)(1).
96 Determinations of the percentage of stock of any corporation held by any person are made on the basis of value. Sec. 382(k)(6)(C).
97 See Treas. Reg. sec. 1.382-2(a)(4) (providing that "a loss corporation is required to determine whether an ownership change has occurred immediately after any owner shift, or issuance or transfer (including an issuance or transfer described in Treas. Reg. sec. 1.382-4(d)(8)(i) or (ii)) of an option with respect to stock of the loss corporation that is treated as exercised under Treas. Reg. sec. 1.382-4(d)(2)" and defining a "testing date" as "each date on which a loss corporation is required to make a determination of whether an ownership change has occurred") and Temp. Treas. Reg. sec. 1.382-2T(e)(1) (defining an "owner shift" as "any change in the ownership of the stock of a loss corporation that affects the percentage of such stock owned by any 5-percent shareholder"). Treasury regulations under section 382 provide that, in computing stock ownership on specified testing dates, certain unexercised options must be treated as exercised if certain ownership, control, or income tests are met. These tests are met only if "a principal purpose of the issuance, transfer, or structuring of the option (alone or in combination with other arrangements) is to avoid or ameliorate the impact of an ownership change of the loss corporation." Treas. Reg. sec. 1.382-4(d). Compare prior temporary regulations, Temp. Treas. Reg. sec. 1.382-2T(h)(4) ("Solely for the purpose of determining whether there is an ownership change on any testing date, stock of the loss corporation that is subject to an option shall be treated as acquired on any such date, pursuant to an exercise of the option by its owner on that date, if such deemed exercise would result in an ownership change."). Notice 2008-76, I.R.B. 2008-39 (September 29, 2008), released September 7, 2008, provides that the Treasury Department intends to issue regulations modifying the term "testing date" under section 382 to exclude any date on or after which the United States acquires stock or options to acquire stock in certain corporations with respect to which there is a "Housing Act Acquisition" pursuant to the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289. The Notice states that the regulations will apply on and after September 7, 2008, unless and until there is additional guidance. Notice 2008-84, I.R.B. 2008-41 (October 14, 2008), provides that the Treasury Department intends to issue regulations modifying the term "testing date" under section 382 to exclude any date as of the close of which the United States owns, directly or indirectly, a more than 50-percent interest in a loss corporation, which regulations will apply unless and until there is additional guidance. Notice 2008-100, 2008-14 I.R.B. 1081 (released October 15, 2008) provides that the Treasury Department intends to issue regulations providing, among other things, that certain instruments acquired by the Treasury Department under the Capital Purchase Program (CPP) pursuant to the Emergency Economic Stabilization Act of 2008, Pub. L. No. 100-343, ("EESA") shall not be treated as stock for certain purposes. The Notice also provides that certain capital contributions made by Treasury pursuant to the CPP shall not be considered to have been made as part of a plan the principal purpose of which was to avoid or increase any section 382 limitation (for purposes of section 382(l)(1)). The Notice states that taxpayers may rely on the rules described unless and until there is further guidance; and that any contrary guidance will not apply to instruments (i) held by Treasury that were acquired pursuant to the CCP prior to publication of that guidance, or (ii) issued to Treasury pursuant to the CCP under written binding contracts entered into prior to the publication of that guidance. Notice 2009-14, 2009-7 I.R.B. 516 (January 30, 2009) amplifies and supersedes Notice 2008-100, and provides additional guidance regarding the application of section 382 and other provisions of law to corporations whose instruments are acquired by the Treasury Department under certain programs pursuant to EESA.
98 Sec. 382(h)(2). The total amount of the loss corporation's RBILs that are subject to the section 382 limitation cannot exceed the amount of the corporation's NUBIL.
102 The total amount of such increases cannot exceed the amount of the corporation's NUBIG.
106 The 1374 approach generally incorporates rules similar to those of section 1374(d) and the Treasury regulations thereunder in calculating NUBIG and NUBIL and identifying RBIG and RBIL.
107 More specifically, NUBIG or NUBIL is calculated by determining the amount that would be realized if immediately before the ownership change the loss corporation had sold all of its assets, including goodwill, at fair market value to a third party that assumed all of its liabilities, decreased by the sum of any deductible liabilities of the loss corporation that would be included in the amount realized on the hypothetical sale and the loss corporation's aggregate adjusted basis in all of its assets, increased or decreased by the corporation's section 481 adjustments that would be taken into account on a hypothetical sale, and increased by any RBIL that would not be allowed as a deduction under section 382, 383 or 384 on the hypothetical sale.
108 Notice 2003-65, section III.B.2.b.
109 Accordingly, unlike the case in which a section 338 election is actually made, contingent consideration (including a contingent liability) is taken into account in the initial calculation of NUBIG or NUBIL, and no further adjustments are made to reflect subsequent changes in deemed consideration.
110 Section 166 does not apply, however, to a debt which is evidenced by a security, defined for this purpose (by cross-reference to section 165(g)(2)(C)) as a bond, debenture, note or certificate or other evidence of indebtedness issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form. Sec. 166(e).
111 See Treas. Reg. sec. 1.166-2(d)(1) and (2).
112 See Treas. Reg. sec. 1.166-2(d)(3); cf. Priv. Ltr. Rul. 9248048 (July 7, 1992); Tech. Adv. Mem. 9122001 (Feb. 8, 1991).
113 2008-42 I.R.B. 2008-42 (Oct. 20, 2008).
114 Notice 2008-83, section 2.
115 Section 382(m) authorizes the Secretary to prescribe such regulations as may be necessary or appropriate to carry out the purposes of sections 382 and 383.
116 Section 383 imposes similar limitations, under regulations, on the use of carryforwards of general business credits, alternative minimum tax credits, foreign tax credits, and net capital loss carryforwards. Section 383 generally refers to section 382 for the meanings of its terms, but requires appropriate adjustments to take account of its application to credits and net capital losses.
117 If the loss corporation had a "net unrealized built in gain" (or NUBIG) at the time of the ownership change, then the section 382 limitation for any taxable year may be increased by the amount of the "recognized built-in gains" (discussed further below) for that year. A NUBIG is defined as the amount by which the fair market value of the assets of the corporation immediately before an ownership change exceeds the aggregate adjusted basis of such assets at such time. However, if the amount of the NUBIG does not exceed the lesser of (i) 15 percent of the fair market value of the corporation's assets or (ii) $10,000,000, then the amount of the NUBIG is treated as zero. Sec. 382(h)(1).
120 Determinations of the percentage of stock of any corporation held by any person are made on the basis of value. Sec. 382(k)(6)(C).
121 See Treas. Reg. sec. 1.382-2(a)(4) (providing that "a loss corporation is required to determine whether an ownership change has occurred immediately after any owner shift, or issuance or transfer (including an issuance or transfer described in Treas. Reg. sec. 1.382-4(d)(8)(i) or (ii)) of an option with respect to stock of the loss corporation that is treated as exercised under Treas. Reg. sec. 1.382-4(d)(2)" and defining a "testing date" as "each date on which a loss corporation is required to make a determination of whether an ownership change has occurred") and Temp. Treas. Reg. sec. 1.382-2T(e)(1) (defining an "owner shift" as "any change in the ownership of the stock of a loss corporation that affects the percentage of such stock owned by any 5-percent shareholder"). Treasury regulations under section 382 provide that, in computing stock ownership on specified testing dates, certain unexercised options must be treated as exercised if certain ownership, control, or income tests are met. These tests are met only if "a principal purpose of the issuance, transfer, or structuring of the option (alone or in combination with other arrangements) is to avoid or ameliorate the impact of an ownership change of the loss corporation." Treas. Reg. sec. 1.382-4(d). Compare prior temporary regulations, Temp. Treas. Reg. sec. 1.382-2T(h)(4) ("Solely for the purpose of determining whether there is an ownership change on any testing date, stock of the loss corporation that is subject to an option shall be treated as acquired on any such date, pursuant to an exercise of the option by its owner on that date, if such deemed exercise would result in an ownership change."). Notice 2008-76, I.R.B. 2008-39 (September 29, 2008), released September 7, 2008, provides that the Treasury Department intends to issue regulations modifying the term "testing date" under section 382 to exclude any date on or after which the United States acquires stock or options to acquire stock in certain corporations with respect to which there is a "Housing Act Acquisition" pursuant to the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289. The Notice states that the regulations will apply on and after September 7, 2008, unless and until there is additional guidance. Notice 2008-84, I.R.B. 2008-41 (October 14, 2008), provides that the Treasury Department intends to issue regulations modifying the term "testing date" under section 382 to exclude any date as of the close of which the United States owns, directly or indirectly, a more than 50 percent interest in a loss corporation, which regulations will apply unless and until there is additional guidance. Notice 2008-100, 2008-14 I.R.B. 1081 (released October 15, 2008) provides that the Treasury Department intends to issue regulations providing, among other things, that certain instruments acquired by the Treasury Department under the Capital Purchase Program (CPP) pursuant to the Emergency Economic Stabilization Act of 2008, Pub. L. No. 100-343, ("EESA") shall not be treated as stock for certain purposes. The Notice also provides that certain capital contributions made by Treasury pursuant to the CPP shall not be considered to have been made as part of a plan the principal purpose of which was to avoid or increase any section 382 limitation (for purposes of section 382(l)(1)). The Notice states that taxpayers may rely on the rules described unless and until there is further guidance; and that any contrary guidance will not apply to instruments (i) held by Treasury that were acquired pursuant to the CCP prior to publication of that guidance, or (ii) issued to Treasury pursuant to the CCP under written binding contracts entered into prior to the publication of that guidance. Notice 2009-14, 2009-7 I.R.B. 516 (January 30, 2009) amplifies and supersedes Notice 2008-100, and provides additional guidance regarding the application of section 382 and other provisions of law to corporations whose instruments are acquired by the Treasury Department under certain programs pursuant to EESA.
122 This exception shall not apply in the case of any subsequent ownership change unless such subsequent ownership change also meets the requirements of the exception.
123 For example, an ownership change has occurred for purposes of determining the testing period under section 382(i)(2).
124 See sections 61(a)(12) and 108. But see section 102 (a debt cancellation which constitutes a gift or bequest is not treated as income to the donee debtor).
127 Treas. Reg. sec. 1.61-12(c)(2)(ii). Treas. Reg. sec. 1.1275-1(b) defines "adjusted issue price."
134 Treas. Reg. sec. 1.108-2(g).
136 Treas. Reg. sec. 1.108-2(g)(2).
138 Section 118 provides, in general, that in the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.
139 Sec. 163(e)(1). For purposes of section 163(e)(1), the daily portion of the original issue discount for any day is determined under section 1272(a) (without regard to paragraph (7) thereof and without regard to section 1273(a)(3)).
148 Sec. 57(a)(7). In the case of qualified small business stock, the percentage of gain excluded from gross income which is an alternative minimum tax preference is (i) seven percent in the case of stock disposed of in a taxable year beginning before 2011; (ii) 42 percent in the case of stock acquired before January 1, 2001, and disposed of in a taxable year beginning after 2010; and (iii) 28 percent in the case of stock acquired after December 31, 2000, and disposed of in a taxable year beginning after 2010.
149 The 50 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
150 The amount of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. The amount so included is the sum of (i) 50 percent (the percentage included in taxable income) of the total gain and (ii) the applicable preference percentage of the one-half gain that is excluded from taxable income.
151 The provision was subsequently modified to provide a 100-percent exclusion for stock issued after September 27, 2010, and before January 1, 2011 by section 2011 of the Small Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part Fourteen. The provision was subsequently extended to stock issued during 2011 by section 760 of Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
152 The 25 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
153 The 46 percent of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. Forty-six percent is the sum of 25 percent (the percentage of total gain included in taxable income) plus 21 percent (the percentage of total gain which is an alternative minimum tax preference).
156 Sec. 1374(d)(8). With respect to such assets, the recognition period runs from the day on which such assets were acquired (in lieu of the beginning of the first taxable year for which the corporation was an S corporation). Sec. 1374(d)(8)(B).
158 The provision was subsequently modified and extended by section 2011 of the Small Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part Fourteen of this document.
159 Shareholders will continue to take into account all items of gain and loss under section 1366.
161 See Rev. Proc. 72-18, 1972-1 C.B. 740.
163 Sec. 265(b)(1). A "financial institution" is any person that (1) accepts deposits from the public in the ordinary course of such person's trade or business and is subject to Federal or State supervision as a financial institution or (2) is a corporation described by section 585(a)(2). Sec. 265(b)(5).
165 Secs. 265(b)(3)(A), 291(a)(3) and 291(e)(1).
170 The 25 percent restriction was enacted by the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, because of concern over the scope of the definition of manufacturing facility. See H.R. Rpt. No. 100-795 (1988). The amendment was intended to clarify that while the manufacturing facility definition does not preclude the financing of ancillary activities, the 25 percent restriction was intended to limit the use of bond proceeds to finance facilities other than for "core manufacturing." The conference agreement followed the House bill, which the conference report described as follows: "The House bill clarifies that up to 25 percent of the proceeds of a qualified small issue may be used to finance ancillary activities which are carried out at the manufacturing site. All such ancillary activities must be subordinate and integral to the manufacturing process."
171 The provision is based in part on a similar rule applicable to exempt facility bonds. Treas. Reg. sec. 1.103-8(a)(3) provides: "(3) Functionally related and subordinate. An exempt facility includes any land, building, or other property functionally related and subordinate to such facility. Property is not functionally related and subordinate to a facility if it is not of a character and size commensurate with the character and size of such facility."
177 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
178 Section 301 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, added a provision to section 6431, allowing the issuer of the bonds to elect to receive a direct payment from the Treasury in lieu of providing a tax credit to the holders of the bonds. For further discussion, see Part Seven of this document.
184 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
185 Section 301 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, added a provision to section 6431, allowing the issuer of the bonds to elect to receive a direct payment from the Treasury in lieu of providing a tax credit to the holders of the bonds. For further discussion, see Part Seven of this document. Also qualified zone academy bonds were further amended in section 758 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
187 The 10 percent private business test is reduced to five percent in the case of private business uses (and payments with respect to such uses) that are unrelated to any governmental use being financed by the issue.
190 See sections 54B, 54C, 54D, and 54E.
191 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
192 Joint Committee on Taxation, Present Law and Issues Related to Infrastructure Finance (JCX 83-08), October 24, 2008. pp. 23-28.
193 Original issue discount (OID) is not treated as a payment of interest for purposes of determining the credit under the provision. OID is the excess of an obligation's stated redemption price at maturity over the obligation's issue price (section 1273(a)).
194 Under Treas. Reg. sec. 150-1(b), capital expenditure means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election or with the application of the definition of placed in service under Treas. Reg. sec. 1.150-2(c)) under general Federal income tax principles. For purposes of applying the "general Federal income tax principles" standard, an issuer should generally be treated as if it were a corporation subject to taxation under subchapter C of chapter 1 of the Code. An example of a capital expenditure would include expenditures made for the purchase of fiber-optic cable to provide municipal broadband service.
195 Under section 148(d)(2), a bond is an arbitrage bond if the amount of the proceeds from the sale of such issue that is part or any reserve or replacement fund exceeds 10 percent of the proceeds. As such the interest on such bond would not be tax-exempt under section 103 and thus would not be a qualified bond for purposes of the provision.
196 Original issue discount (OID) is not treated as a payment of interest for purposes of calculating the refundable credit under the provision.
198 The 10 percent private business test is reduced to five percent in the case of private business uses (and payments with respect to such uses) that are unrelated to any governmental use being financed by the issue.
201 See sections 54B, 54C, 54D, and 54E.
202 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
203 The Bureau of Labor Statistics prepares data on regional and State employment and unemployment. See, e.g., Bureau of Labor Statistics, USDL 09-0093, Regional and State Employment and Unemployment: December 2008 (January 27, 2009), <<http://www.bls.gov/news.release/laus.nr0.htm>.
205 Sec. 141(b)(6); Treas. Reg. sec. 1.141-1(b).
209 See sections 54B, 54C, 54D, and 54E.
210 See section 54A(h), which also covers real estate investment trusts.
211 A technical correction may be necessary so that the statute reflects this intent.
212 The provision was subsequently amended by section 301(d) of the Regulated Investment Company Modernization Act of 2010, Pub. L. 111-325, described in Part Seventeen of this document.
213 Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-554 (2000).
214 12 U.S.C. sec. 4702(17) (defines "low-income" for purposes of 12 U.S.C. sec. 4702(20)).
215 The provision was subsequently amended by section 733 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
216 Sec. 45. In addition to the renewable electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.
221 Sec. 45. In addition to the electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.
223 Additional provisions that (1) allow section 45 facilities to elect to be treated as section 48 energy property, and (2) allow section 45 and 48 facilities to elect to receive a grant from the Department of the Treasury rather than the section 45 production credit or the section 48 energy credit, are described by sections D.2 and D.4 of Part Two of this document.
227 Sec. 45. In addition to the renewable electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.
229 The provision was subsequently amended by section 707 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
231 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
232 See Notice 2009-15, 2009-6 I.R.B. 449 (January 22, 2009).
233 Section 301 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, added a provision to section 6431, allowing the issuer of the bonds to elect to receive a direct payment from the Treasury in lieu of providing a tax credit to the holders of the bonds. For further discussion, see Part Seven of this document.
234 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
235 See Notice 2009-15, 2009-6 I.R.B. 449 (January 22, 2009).
236 Section 301 of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, added a provision to section 6431, allowing the issuer of the bonds to elect to receive a direct payment from the Treasury in lieu of providing a tax credit to the holders of the bonds. For further discussion, see Part Seven of this document.
237 The highest tier in effect at this time was tier 2, requiring SEER of at least 15 and EER of at least 12.5 for split central air conditioning systems and SEER of at least 14 and EER of at least 12 for packaged central air conditioning systems.
238 The provision was subsequently amended by section 710 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
240 The provision was subsequently amended by section 711 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
245 Secs. 132(f), 3121(b)(2), 3306(b)(16), and 3401(a)(19).
246 The provision was subsequently amended by section 727 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
247 Sec. 45. In addition to the electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.
250 The COBRA rules were added to the Code by the Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272. The rules were originally added as Code sections 162(i) and (k). The rules were later restated as Code section 4980B, pursuant to the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647.
251 A governmental plan also includes certain plans established by an Indian tribal government.
252 If the plan is a multiemployer plan, then each of the employers contributing to the plan for a calendar year must normally employ fewer than 20 employees during the preceding calendar year.
253 In the case of a qualified beneficiary who is determined, under Title II or XVI of the Social Security Act, to have been disabled during the first 60 days of continuation coverage, the 18 month minimum coverage period is extended to 29 months with respect to all qualified beneficiaries if notice is given before the end of the initial 18 month continuation coverage period.
254 In the case of a qualified beneficiary whose minimum coverage period is extended to 29 months on account of a disability determination, the premium for the period of the disability extension may not exceed 150 percent of the applicable premium for the period.
255 Secs. 601 to 608 of ERISA.
256 Continuation coverage rights similar to COBRA continuation coverage rights are provided to individuals covered by health plans maintained by the Federal government. 5 U.S.C. sec. 8905a. Group health plans maintained by a State that receives funds under Chapter 6A of Title 42 of the United States Code (the Public Health Service Act) are required to provide continuation coverage rights similar to COBRA continuation coverage rights for individuals covered by plans maintained by such State (and plans maintained by political subdivisions of such State and agencies and instrumentalities of such State or political subdivision of such State). 42 U.S.C. sec. 300bb-1.
257 Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions contained in Title I and Title III of H.R. 598, the "American Recovery and Reinvestment Tax Act of 2009, Scheduled for Markup by the Committee on Ways and Means on January 22, 2009 (JCX-7-09), January 21, 2009, footnote 9.
258 This provision was subsequently extended in sec. 1010(b) of the Department of Defense Appropriations Act, Pub. L. No. 111-118, described in Part Twenty-One of this document.
259 For this purpose, payment by an assistance eligible individual includes payment by another individual paying on behalf of the individual, such as a parent or guardian, or an entity paying on behalf of the individual, such as a State agency or charity. Further, the amount of the premium used to calculate the reduced premium is the premium amount that the employee would be required to pay for COBRA continuation coverage absent this premium reduction (e.g. 102 percent of the "applicable premium" for such period).
260 The provision was subsequently clarified in sec. 3(b) of the Temporary Extension Act of 2010, Pub. L. No. 111-144, described in Part Twenty-One of this document.
261 The provision was subsequently extended in sec. 1010(a) of the Department of Defense Appropriations Act, Pub. L. No. 111-118, sec. 3(a) of the Temporary Extension Act of 2010, Pub. L. No. 111-144, and sec. 2(a) of the Continuing Extension Act of 2010, Pub. L. No. 111-157, described in Part Twenty-One of this document.
262 All references to "Federal COBRA continuation coverage" mean the COBRA continuation coverage provisions of the Code, ERISA, and PHSA.
263 The provision was subsequently extended in sec. 101(b) of the Department of Defense Appropriations Act, Pub. L. No. 111-118, described in Part Twenty-One of this document.
264 Section 9801 provides that a group health plan may impose a pre-existing condition exclusion for no more than 12 months after a participant or beneficiary's enrollment date. Such 12-month period must be reduced by the aggregate period of creditable coverage (which includes periods of coverage under another group health plan). A period of creditable coverage can be disregarded if, after the coverage period and before the enrollment date, there was a 63-day period during which the individual was not covered under any creditable coverage. Similar rules are provided under ERISA and PHSA.
265 Applicable continuation coverage that qualifies for the subsidy and thus for reimbursement is not limited to coverage required to be offered under the Code's COBRA rules but also includes continuation coverage required under State law that requires continuation coverage comparable to the continuation coverage required under the Code's COBRA rules for group health plans not subject to those rules (e.g., a small employer plan) and includes continuation coverage requirements that apply to health plans maintained by the Federal government or a State government. The person to whom the reimbursement is payable is either (1) the multiemployer group health plan, (2) the employer maintaining the group health plan subject to Federal COBRA continuation coverage requirements, and (3) the insurer providing coverage under an insured plan.
267 Sec. 3102 (relating to FICA taxes applicable to employees) and sec. 3111 (relating to FICA taxes applicable to employers).
268 In determining any amount transferred or appropriated to any fund under the Social Security Act, amounts credited against an employer's payroll tax obligations pursuant to the provision shall not be taken into account.
269 Pub. L. No. 107-210 (2002).
270 An individual is eligible for the advance payment of the credit once a qualified health insurance costs credit eligibility certificate is in effect. Sec. 7527.
271 An eligible month must begin after November 4, 2002. This date is 90 days after the date of enactment of the Trade Act of 2002, Pub. L. No. 107-210, which was August 6, 2002.
272 The eligibility rules and conditions for such an allowance are specified in chapter 2 of title II of the Trade Act of 1974. Among other requirements, payment of a trade readjustment allowance is conditioned upon the individual enrolling in certain training programs or receiving a waiver of training requirements.
273 Excepted benefits are: (1) coverage only for accident or disability income or any combination thereof; (2) coverage issued as a supplement to liability insurance; (3) liability insurance, including general liability insurance and automobile liability insurance; (4) worker's compensation or similar insurance; (5) automobile medical payment insurance; (6) credit-only insurance; (7) coverage for on-site medical clinics; (8) other insurance coverage similar to the coverages in (1)-(7) specified in regulations under which benefits for medical care are secondary or incidental to other insurance benefits; (9) limited scope dental or vision benefits; (10) benefits for long-term care, nursing home care, home health care, community-based care, or any combination thereof; and (11) other benefits similar to those in (9) and (10) as specified in regulations; (12) coverage only for a specified disease or illness; (13) hospital indemnity or other fixed indemnity insurance; and (14) Medicare supplemental insurance.
274 An amount is considered paid by the employer if it is excludable from income. Thus, for example, amounts paid for health coverage on a salary reduction basis under an employer plan are considered paid by the employer. A rule aggregating plans of the same employer applies in determining whether the employer pays at least 50 percent of the cost of coverage.
275 COBRA continuation is defined by section 9832(d)(1).
276 For this purpose, "individual health insurance" means any insurance which constitutes medical care offered to individuals other than in connection with a group health plan. Such term does not include Federal- or State-based health insurance coverage.
277 For guidance on how a State elects a health program to be qualified health insurance for purposes of the credit, see Rev. Proc. 2004-12, 2004-1 C.B. 528.
278 Creditable coverage is determined under section 9801(c) of the Health Insurance Portability and Accountability Act, Pub. L. No. 104-191.
280 The provision was subsequently amended by sections 111-118 of the Omnibus Trade Act of 2010, Pub. L. No. 111-344, described in Part Eighteen of this document.
281 In the case of a dependent, the rule applies to the taxpayer to whom the personal exemption deduction under section 151 is allowable.
282 H.R. 1512. The House passed H.R. 1512 on March 18, 2009. The bill passed the Senate without amendment on March 18, 2009. The President signed the bill on March 30, 2009.
283 H.R. 3607. The House passed H.R. 3607 on September 23, 2009. The bill passed the Senate without amendment on September 24, 2009. the President signed the bill on October 1, 2009.
284 H.R. 4217. The House passed H.R. 4217 on December 8, 2009. The bill passed the Senate without amendment on December 10, 2009. The President signed the bill on December 16, 2009.
285 H.R. 4957. The House passed H.R. 4957 on March 25, 2010. The bill passed the Senate without amendment on March 26, 2010. The President signed the bill on March 31, 2010.
286 H.R. 5147. The House passed H.R. 5147 on April 28, 2010. The bill passed the Senate without amendment on April 28, 2010. The President signed the bill on April 30, 2010.
287 H.R. 5611. The House passed H.R. 5611 on June 29, 2010. The bill passed the Senate without amendment on June 30, 2010. The President signed the bill on July 2, 2010.
288 H.R. 5900. The House passed H.R. 5900 on July 29, 2010. The bill passed the Senate without amendment on July 30, 2010. The President signed the bill on August 1, 2010.
289 H.R. 6190. The House passed H.R. 6190 on September 23, 2010. The bill passed the Senate without amendment on September 24, 2010. The President signed the bill on September 30, 2010.
290 H.R. 6473. The House passed H.R. 6473 on December 2, 2010. The bill passed the Senate without amendment on December 18, 2010. The President signed the bill on December 22, 2010.
291 H.R. 3357. The bill passed the House on July 29, 2009. The Senate passed the bill on July 30, 2009, without amendment. The President signed the bill on August 7, 2009.
292 H.R. 2918. The bill passed the House on June 19, 2009. The Senate passed the bill with an amendment on July 6, 2009. A conference report was filed on September 24, 2009 (H.R. Rep. No. 111-265) and passed the House on September 25, 2009, and the Senate on September 30, 2009. The President signed the bill on October 1, 2009.
293 H.R. 3326. The bill passed the House on July 30, 2009. The Senate passed the bill with an amendment on October 6, 2009. The House agreed to the Senate amendment with an amendment on December 16, 2009. The Senate concurred in the House amendment to the Senate amendment on December 19, 2009. The President signed the bill on December 19, 2009.
294 H.R. 4691. The bill passed the House on February 25, 2010. The Senate passed the bill without amendment on March 2, 2010. The President signed the bill on March 2, 2010.
295 H.R. 2847. The bill passed the House on June 18, 2009. The Senate passed the bill with an amendment on November 5, 2009. The House agreed to the Senate amendment with an amendment on December 16, 2009. The Senate concurred in the House amendment to the Senate amendment with an amendment on February 24, 2010. The House agreed to the Senate amendment with an amendment to the House amendment to the Senate amendment on March 4, 2010. The Senate concurred in the House amendment to the Senate amendment to the House amendment to the Senate amendment on March 17, 2010. The President signed the bill on March 18, 2010.
296 H.R. 3082. The bill passed the House on July 10, 2009. The Senate passed the bill with an amendment on November 17, 2009. The House agreed to the Senate Amendment with an amendment on December 8, 2010. The Senate concurred in the House amendment to the Senate amendment with an amendment on December 21, 2010. The House agreed to the Senate amendment to the House amendment to the Senate amendment on December 21, 2010. The President signed the bill on December 22, 2010.
297 H.R. 3548. The bill passed the House on the suspension calendar on September 22, 2009. The Senate passed the bill with an amendment on November 4, 2009. The House agreed to the Senate amendment on the suspension calendar on November 5, 2009. The President signed the bill on November 6, 2009. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of Certain Revenue Provisions of the "Worker, Homeownership, and Business Assistance Act of 2009" (JCX 44-09), November 3, 2009.
298 For purchases before January 1, 2009, the dollar limits are $7,500 ($3,750 for a married individual filing separately).
300 If the individual sells the home (or the home ceases to be used as the principal residence of the individual and the individual's spouse) in the same taxable year the home is purchased, no credit is allowed.
301 This provision was subsequently amended by section 2 of the Homebuyer Assistance and Improvement Act of 2010, Pub. L. No. 111-98, described in Part Ten of this document.
303 If the individual sells the home (or the home ceases to be used as the principal residence of the individual and the individual's spouse) in connection with such orders in the same taxable year the home is purchased, the credit is allowable.
304 These terms have the same meaning as under the provision for exclusion of gain on the sale of certain principal residences (Sec. 121).
306 Sec. 172(b)(1)(A). Different carryback periods apply with respect to NOLs arising in certain special circumstances.
312 For all elections under this provision, the common parent of a group of corporations filing a consolidated return makes the election, which is binding on all such corporations.
313 The taxable income limitation only applies to that portion of an applicable NOL that is carried back to the fifth preceding taxable year under subparagraph (H) of section 172(b)(1). The limitation does not apply to the portion of the loss carried back under another subparagraph of section 172(b)(1), such as a specified liability loss, farming loss, or qualified disaster loss.
314 It is intended that in applying the 50-percent taxable income limitation with respect to the carryback of an alternative tax NOL deduction to the fifth preceding taxable year, the limitation is applied separately based on alternative minimum taxable income.
315 It is anticipated that the procedures for making the election will be substantially similar to those prescribed for eligible small businesses under present law. See Rev. Proc. 2009-26, 2009-19 I.R.B. 935.
316 Present law section 172(b)(1)(H)(iii) provides that an eligible small business must make the election by the extended due date for filing its return for the taxable year of the NOL. An eligible small business that did not (or does not) timely elect to carryback its applicable 2008 NOL under present law is subject to the general provision (i.e., election available for either 2008 or 2009 NOL and 50 percent of taxable income limitation applies for the fifth taxable year preceding the loss year).
317 For example, if the Federal government acquires an equity interest in the taxpayer during 2010, or in later years, the taxpayer is not entitled to the extended carryback rules under this provision. If the carryback has previously been claimed, amended filings may be necessary to reflect this disallowance. Additionally, if the Federal government acquired an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008 and the taxpayer has repaid that investment, it is not entitled to the extended carryback rules under this provision.
319 For example, a taxpayer with an NOL in 2008 that in 2009 joins an affiliated group with a member in which the Federal government has acquired an equity interest pursuant to the Emergency Economic Stabilization Act of 2008 may not utilize the extended carryback rules under this provision with regard to the 2008 NOL. The taxpayer is required to amend prior filings to reflect the permitted carryback period.
320 As defined in section 3 of the Emergency Economic Stabilization Act of 2008.
322 Pub. L. No. 89-754, 42 U.S.C. 3374.
324 However, exceptions to the fungibility principle are provided in particular cases, some of which are described below.
325 One such exception is that the affiliated group for interest allocation purposes includes section 936 corporations (certain electing domestic corporations that have income from the active conduct of a trade or business in Puerto Rico or another U.S. possession) that are excluded from the consolidated group.
326 Temp. Treas. Reg. sec. 1.861-11T(d)(4).
329 Pub. L. No. 108-357, sec. 401.
330 For purposes of determining the assets of the worldwide affiliated group, neither stock in corporations within the group nor indebtedness (including receivables) between members of the group is taken into account.
331 Although the interest expense of a foreign subsidiary is taken into account for purposes of allocating the interest expense of the domestic members of the electing worldwide affiliated group for foreign tax credit limitation purposes, the interest expense incurred by a foreign subsidiary is not deductible on a U.S. return.
332 Indirect ownership is determined under the rules of section 958(a)(2) or through applying rules similar to those of section 958(a)(2) to stock owned directly or indirectly by domestic partnerships, trusts, or estates.
333 See Treas. Reg. sec. 1.904-4(e)(2).
334 As originally enacted under AJCA, the worldwide interest allocation rules were effective for taxable years beginning after December 31, 2008. However, section 3093 of the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, delayed the implementation of the worldwide interest allocation rules for two years, until taxable years beginning after December 31, 2010.
335 The effective date of the worldwide interest allocation rules was subsequently further delayed by section 551 of the Hiring Incentives to Restore Employment Act of 2010, Pub. L. No. 111-147, described in Part Seven of this document.
336 Secs. 6031 and 6037, respectively.
337 Secs. 6698 and 6699, respectively.
340 Partnerships with more than 100 partners are required to file electronically. Sec. 6011(e)(2).
342 Sec. 6724(c). If a corporation fails to comply with the electronic filing requirements for more than 250 returns that it is required to file, it may be subject to the penalty for failure to file information returns under section 6721. For partnerships, the penalty may be imposed only if the failure extends to more than 100 returns.
343 Treas. Reg. secs. 301.6011-5, 301.6033-4, 301.6037-2.
345 Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
346 All the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
347 H.R. 4462. The bill passed the House on the suspension calendar on January 20, 2010. The Senate passed the bill by unanimous consent on January 21, 2010. The President signed the bill on January 22, 2010. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of H.R. 4462: A Bill to Accelerate the Income Tax Benefits for Charitable Cash Contributions for the Relief of Victims of the Earthquake in Haiti (JCX-2-10), January 20, 2010.
349 H.R. 2847. The bill originated as an appropriations bill and passed the House on June 18, 2009. The bill passed the Senate with an amendment on November 5, 2009. On December 16, 2009, the House agreed to the Senate amendment with an amendment containing revenue provisions. On February 24, 2010, the Senate concurred in the House amendment to the Senate amendment with an amendment substituting the text of the Hiring Incentives to Restore Employment Act. On March 4, 2010, the House agreed to the Senate amendment with an amendment. On March 17, 2010, the Senate concurred in the House amendment. The President signed the bill on March 18, 2010.
350 For purposes of computing net earnings from self employment, taxpayers are permitted a deduction equal to the product of the taxpayer's earnings (determined without regard to this deduction) and one-half of the sum of the rates for OASDI tax (12.4 percent) and HI tax (2.9 percent), i.e., 7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee's wages, which do not include FICA taxes paid by the employer, whereas the self-employed individual's net earnings are economically equivalent to an employee's wages plus the employer share of FICA taxes.
351 It is intended that an employer may qualify for the credit when it hires an otherwise qualified individual to replace an individual whose employment was terminated, for cause or due to other facts and circumstances. For example, an employer may qualify for the credit with respect to wages paid pursuant to the reopening of a factory which had been previously closed due to lack of demand for the product being produced (i.e., the employer may qualify by rehiring qualified individuals who had in the past worked for the employer but were terminated when the factory was closed or by hiring qualified individuals who had not previously worked for the employer). In contrast, an employer who terminates the employment of an individual not for cause, but rather to claim the credit with respect to the hiring of the same or another individual is not eligible for the credit under this rule.
354 Possessions with mirror code tax systems are the United States Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.
355 Possessions that do not have mirror code tax systems are Puerto Rico and American Samoa.
356 Additional section 179 incentives are provided with respect to qualified property meeting applicable requirements that is used by a business in an empowerment zone (sec. 1397A), a renewal community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
357 The temporary $250,000 and $800,000 amounts were enacted in the Economic Stimulus Act of 2008, Pub. L. No. 110-185, and extended for taxable years beginning in 2009 by the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5.
358 Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election under section 179 without the consent of the Commissioner on an amended Federal tax return for that taxable year. This amended return must be filed within the time prescribed by law for filing an amended return for the taxable year. T.D. 9209, July 12, 2005.
359 Section 179(c)(2) provides that with respect to any taxable year beginning after 2002 and before 2011, a taxpayer may revoke its section 179 election with respect to any property, and such revocation, once made is irrevocable.
360 The provision was temporarily expanded and extended for taxable years beginning in 2010 and 2011 by section 2021 of the Small Business Jobs Act of 2010, Pub. L. No. 111-240, described in Part Fourteen. The provision was further modified and extended through 2012 by section 402 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
363 Sec. 54AA(d). Subject to updated IRS reporting forms or procedures, an issuer of build America bonds makes the election required by 54AA on its books and records on or before the issue date of such bonds. Notice 2009-26, 2009-16 I.R.B. 833.
364 Sec. 54AA(d)(2)(A). Section 149(b) provides that section 103(a) shall not apply to any State or local bond if such bond is federally guaranteed.
368 Sec. 54AA(a) and (b). Original issue discount ("OID") is not treated as a payment of interest for purposes of determining the credit under the provision. OID is the excess of an obligation's stated redemption price at maturity over the obligation's issue price (section 1273(a)).
373 Sec. 54AA(g)(1). OID is not treated as a payment of interest for purposes of calculating the refundable credit under the provision.
374 Sec. 54AA(g). Under Treas. Reg. sec. 150-1(b), capital expenditure means any cost of a type that is properly chargeable to capital account (or would be so chargeable with a proper election or with the application of the definition of placed in service under Treas. Reg. sec. 1.150-2(c)) under general Federal income tax principles. For purposes of applying the "general Federal income tax principles" standard, an issuer should generally be treated as if it were a corporation subject to taxation under subchapter C of chapter 1 of the Code. An example of a capital expenditure would include expenditures made for the purchase of fiber-optic cable to provide municipal broadband service.
375 Sec. 54AA(g)(2)(B). Subject to updated IRS reporting forms or procedures, an issuer of direct-pay build America bonds makes the election required by section 54AA(g)(2)(B) on its books and records on or before the issue date of such bonds. Notice 2009-26, 2009-16 I.R.B. 833.
381 Sec. 54A(b)(3). However, for New CREBs and QECs, the applicable credit rate is 70 percent of the otherwise applicable rate.
382 See Notice 2009-15, 2009-6 I.R.B. 449 (January 22, 2009). Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
401 Sec. 54C(d)(4). A mutual or cooperative electric company can be tax exempt under section 501(c)(12) only if 85 percent or more of its income consists of amounts collected from members for the sole purpose of meeting losses and expenses (the "85-percent income test"). Certain types of income, e.g., income from qualified pole rentals, are not taken into account for purposes of the 85-percent income test. Sec. 501(c)(12)(C).
403 Section 54C(c)(4) increases the original $800 million allocation by $1.6 billion for a total of $2.4 billion.
404 Secs. 54C(c)(2) and (c)(4).
408 For example, States may issue QECs to finance retrofits of existing private buildings through loans and/or grants to individual homeowners or businesses, or through other repayment mechanisms. Other repayment mechanisms can include periodic fees assessed on a government bill or utility bill that approximates the energy savings of energy efficiency or conservation retrofits. Retrofits can include heating, cooling, lighting, water-saving, storm water-reducing, or other efficiency measures.
416 Sec. 54D(e)(3). In the case of any bond used for the purpose of providing grants, loans or other repayment mechanisms for capital expenditures to implement green community programs, such bond shall not be treated as a private activity bond for purposes of determining whether this requirement is met. Sec. 54D(e)(4).
420 Sec. 54E(d)(1); Pub. L. No. 79-396.
433 It is anticipated that the election procedure will be similar to the procedure for making the election required under Sec. 54AA(g) for a direct-pay build America bond. See Notice 2009-26, 2009-16 I.R.B. 833.
434 The Department of Defense Appropriations Act of 2010, Pub. L. No. 111-118, Division B, sec. 1008 (2009).
437 Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b). For purposes of the withholding tax rules applicable to payments to nonresident alien individuals and foreign corporations, a withholding agent is defined broadly to include any U.S. or foreign person that has the control, receipt, custody, disposal, or payment of an item of income of a foreign person subject to withholding. Treas. Reg. sec. 1.1441-7(a).
438 Although technically insurance premiums paid to a foreign insurer or reinsurer are FDAP income, they are exempt from withholding under Treas. Reg. sec. 1.1441-2(a)(7) if the insurance contract is subject to the excise tax under section 4371.
439 Treas. Reg. sec. 1.1441-2(b)(1)(i), -2(b)(2). However, gain on a sale or exchange of section 306 stock of a domestic corporation is FDAP income to the extent section 306(a) treats the gain as ordinary income. Treas. Reg. sec. 1.306-3(h).
440 Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1). Interest paid by the U.S. branch of a foreign corporation is also treated as U.S.-source interest under section 884(f)(1).
441 Secs. 861(a)(2), 862(a)(2).
444 Secs. 871(h), 881(c). Congress believed that the imposition of a withholding tax on portfolio interest paid on debt obligations issued by U.S. persons might impair the ability of domestic corporations to raise capital in the Eurobond market (i.e., the global market for U.S. dollar-denominated debt obligations). Congress also anticipated that repeal of the withholding tax on portfolio interest would allow the Treasury Department direct access to the Eurobond market. See Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (JCS-41-84), December 31, 1984, pp. 391-92.
445 Sec. 871(h)(3). A 10-percent shareholder includes any person who owns 10 percent or more of the total combined voting power of all classes of stock of the corporation (in the case of a corporate obligor), or 10 percent or more of the capital or profits interest of the partnership (in the case of a partnership obligor). The attribution rules of section 318 apply for this purpose, with certain modifications.
446 Sec. 871(h)(4). Contingent interest generally includes any interest if the amount of such interest is determined by reference to any receipts, sales, or other cash flow of the debtor or a related person; any income or profits of the debtor or a related person; any change in value of any property of the debtor or a related person; any dividend, partnership distributions, or similar payments made by the debtor or a related person; and any other type of contingent interest identified by Treasury regulation. Certain exceptions also apply.
447 Sec. 881(c)(3)(C). A related person includes, among other things, an individual owning more than 50 percent of the stock of the corporation by value, a corporation that is a member of the same controlled group (defined using a 50-percent common ownership test), a partnership if the same persons own more than 50 percent in value of the stock of the corporation and more than 50 percent of the capital interests in the partnership, any U.S. shareholder (as defined in section 951(b) and generally including any U.S. person who owns 10 percent or more of the voting stock of the corporation), and certain persons related to such a U.S. shareholder.
449 An obligation is treated as in registered form if: (1) it is registered as to both principal and interest with the issuer (or its agent) and transfer of the obligation may be effected only by surrender of the old instrument and either the reissuance by the issuer of the old instrument to the new holder or the issuance by the issuer of a new instrument to the new holder; (2) the right to principal and stated interest on the obligation may be transferred only through a book entry system maintained by the issuer or its agent; or (3) the obligation is registered as to both principal and interest with the issuer or its agent and may be transferred through both of the foregoing methods. Treas. Reg. sec. 5f.103-1(c).
450 Sec. 871(h)(2)(B), (5); Treas. Reg. sec. 1.871-14(e). This certification of non-U.S. ownership most commonly is made on an IRS Form W-8. This certification is not valid if the Secretary determines that statements from the person making the certification do not meet certain requirements.
451 Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
452 Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-1(b)(4)(ii). If the bank deposit interest is effectively connected with a U.S. trade or business, it is subject to regular U.S. income tax rather than withholding tax.
453 Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441-1(b)(4)(iv).
454 Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A), (B). However, Treasury regulations require a bank to report interest if the recipient is a resident of Canada and the deposit is maintained at an office in the United States. Treas. Reg. secs. 1.6049-4(b)(5), 1.6049-8. This reporting is required to comply with the obligations of the United States under the U.S.-Canada income tax treaty. T.D. 8664, 1996-1 C.B. 292. In 2001, the IRS and the Treasury Department issued proposed regulations that would require annual reporting to the IRS of U.S. bank deposit interest paid to any foreign individual. 66 Fed. Reg. 3925 (Jan. 17, 2001). The 2001 proposed regulations were withdrawn in 2002 and replaced with proposed regulations that would require reporting with respect to payments made only to residents of certain specified countries (Australia, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, and the United Kingdom). 67 Fed. Reg. 50,386 (Aug. 2, 2002). The proposed regulations have not been finalized.
455 Sec. 871(a)(2). In most cases, however, an individual satisfying this presence test will be treated as a U.S. resident under section 7701(b)(3), and thus will be subject to full residence-based U.S. income taxation.
456 Secs. 881(a), 631(b), (c).
457 Sec. 897. Section 1445 imposes withholding requirements with respect to such dispositions.
459 A number of recent U.S. income tax treaties eliminate withholding tax on dividends paid to a majority (typically 80-percent or greater) shareholder, including the present treaties with Australia, Belgium, Denmark, Finland, Germany, Japan, Mexico, the Netherlands, Sweden, and the United Kingdom.
460 Treas. Reg. sec. 1.1461-1(b), (c). IRS Form 1042, "Annual Withholding Tax Return for U.S. Source Income of Foreign Persons," is the IRS form on which a withholding agent reports a summary of the total U.S.-source income paid and withholding tax withheld on foreign persons for the year. IRS Form 1042-S, "Foreign Person's U.S. Source Income Subject to Withholding," is the IRS form on which a withholding agent reports, to the foreign person and the IRS, a foreign person's U.S.-source income that is subject to reporting.
462 See secs. 6511(a) (prescribing the period within which a claim must be filed) and 6511(b)(2) (limiting the amount that can be recovered if a claim is not filed within three years of filing a return). If a return is not filed, a claim for refund of any tax paid must be filed within two years of payment.
476 123 F.3d 1460, 1465 (Fed. Cir. 1997).
477 See Treas. Reg. sec. 1.1441-1(b)(5).
478 A fifth type of IRS Form W-8, the W-8CE, is filed to provide the payor with notice of a taxpayer's expatriation.
479 The United States imposes tax on the beneficial owner of income, not its formal recipient. For example, if a U.S. citizen owns securities that are held in "street" name at a brokerage firm, that U.S. citizen (and not the brokerage firm nominee) is treated as the beneficial owner of the securities. A corporation (and not its shareholders) ordinarily is treated as the beneficial owner of the corporation's income. Similarly, a foreign complex trust ordinarily is treated as the beneficial owner of income that it receives, and a U.S. beneficiary or grantor is not subject to tax on that income unless and until he receives a distribution.
480 The IRS Form W-8ECI requires that the beneficial owner specify the items of income to which the form is intended to apply and certify that those amounts are effectively connected with the conduct of a trade or business in the United States and includible in the beneficial owner's gross income for the taxable year.
481 The IRS Form W-8EXP requires that the beneficial owner certify as to its qualification as a foreign government, an international organization, a foreign central bank of issue or a foreign tax-exempt organization, in each case meeting certain requirements.
482 In limited cases, the intermediary may furnish documentary evidence, other than the IRS Form W-8, of the status of the beneficial owner.
483 Rev. Proc. 2003-64, 2003-32 I.R.B. 306 (July 10, 2003), provides procedures for qualification as a withholding foreign partnership or withholding foreign trust in addition to providing model withholding agreements.
484 Sec. 6041; Treas. Reg. secs. 1.6041-1, 1.6041-2.
485 See secs. 6042 (dividends), 6045 (broker reporting), 6049 (interest), and the corresponding Treasury regulations.
486 See Treas. Reg. secs. 31.3406(d)-1, 31.3406(h)-3.
489 See Treas. Reg. secs. 1.1441-7(a) (definition of withholding agent includes foreign persons), 31.3406(a)-2 (payor for backup withholding purposes means the person (the payor) required to file information returns for payments of interest, dividends, and gross proceeds (and other amounts)), 1.6049-4(a)(2) (definition of payor for interest reporting purposes does not exclude foreign persons), 1.6042-3(b)(2) (payor for dividend reporting purposes has the same meaning as for interest reporting purposes), 1.6045-1(a)(1) (brokers required to report include foreign persons). But see Treas. Reg. secs. 1.6049-5(b) (exception for interest from sources outside the U.S. paid outside the U.S. by a non-U.S. payor or a non-U.S. middleman), 1.6045-1(g)(1)(i) (exception for sales effected at an office outside the U.S. by a non-U.S. payor or a non-U.S. middleman), 1.6042-3(b)(1)(iv) (exceptions for distributions from sources outside the U.S. by a non-U.S. payor or a non-U.S. middleman).
490 The definition also includes: a foreign branch or office of a U.S. financial institution or U.S. clearing organization; a foreign corporation for purposes of presenting income tax treaty claims on behalf of its shareholders; and any other person acceptable to the IRS, in each case that such person has entered into a withholding agreement with the IRS. Treas. Reg. sec. 1.1441-1(e)(5)(ii).
491 U.S. withholding agents are allowed to rely on a QI's IRS Form W-8IMY without any underlying beneficial owner documentation. By contrast, nonqualified intermediaries are required both to provide an IRS Form W-8IMY to a U.S. withholding agent and to forward with that document IRS Forms W-8 or W-9 or other specified documentation for each beneficial owner.
492 See Rev. Proc. 2000-12, 2000-1 C.B. 387, QI agreement secs. 2.12, 5.03, 6.01.
493 Rev. Proc. 2000-12, 2000-1 C.B. 387, supplemented by Announcement 2000-50, 2000-1 C.B. 998, and modified by Rev. Proc. 2003-64, 2003-2 C.B. 306, and Rev. Proc. 2005-77, 2005-2 C.B. 1176. The QI agreement applies only to foreign financial institutions, foreign clearing organizations, and foreign branches or offices of U.S. financial institutions or U.S. clearing organizations. However, the principles of the QI agreement may be used to conclude agreements with other persons defined as QIs.
494 See Rev. Proc. 2000-12, 2000-1 C.B. 387, sec. 3.02.
495 Additional detail can be found in Joint Committee on Taxation, Selected Issues Relating to Tax Compliance with Respect to Offshore Accounts and Entities (JCX-65-08), July 23, 2008.
496 Regardless of whether a QI assumes primary Form 1099 reporting and backup withholding responsibility, the QI is responsible for IRS Form 1099 reporting and backup withholding on certain reportable payments that are not reportable amounts. See Rev. Proc. 2000-12, 2001-1 C.B. 387, QI agreement secs. 2.43 (defining reportable amount), 2.44 (defining reportable payment), 3.05, 8.04. The reporting responsibility differs depending on whether the QI is a U.S. payor or a non-U.S. payor. Examples of payments for which the QI assumes primary IRS Form 1099 reporting and backup withholding responsibility include certain broker proceeds from the sale of certain assets owned by a U.S. non-exempt recipient and payments of certain foreign-source income to a U.S. non-exempt recipient if such income is paid in the United States or to an account maintained in the United States.
497 To the extent that a QI assumes primary responsibility for an account, it must do so for all payments made by the withholding agent to that account. See Rev. Proc. 2000-12, QI agreement sec. 3.
498 See Rev. Proc. 2000-12, QI agreement sec. 5.
499 The QI agreement contains its own presumption rules. See Rev. Proc. 2000-12, QI agreement sec. 5.13(C). An amount subject to withholding that is paid outside the United States to an account maintained outside the United States is presumed made to an undocumented foreign account holder (i.e., subject to 30-percent withholding). Payments of U.S. source deposit interest and certain other U.S. source interest and original issue discount paid outside of the United States to an offshore account is presumed made to an undocumented U.S. non-exempt account holder (i.e., subject to backup withholding). For payments of foreign source income, broker proceeds and certain other amounts, the QI can assume such payments are made to an exempt recipient if the amounts are paid outside the United States to an account maintained outside the United States.
500 Documentary evidence is any documentation obtained under know-your-customer rules per the QI agreement, evidence sufficient to establish a reduced rate of withholding under Treas. Reg. sec. 1.1441-6, and evidence sufficient to establish status for purposes of chapter 61 under Treas. Reg. sec. 1.6049-5(c). See Rev. Proc. 2000-12, 2000-1 C.B. 387, QI agreement sec. 2.12.
501 This rule restricts one of the principal benefits of the QI regime, nondisclosure of account holders, to financial institutions that have assumed the documentation and other obligations associated with QI status.
502 These amounts are statutorily exempt from nonresident withholding when paid to non-U.S. persons.
503 A reporting pool consists of income that falls within a particular withholding rate and within a particular income code, exemption code, and recipient code as determined on IRS Form 1042-S.
504 For undisclosed accounts, QIs must separately report each type of reportable payment (determined by reference to the types of income reported on IRS Forms 1099) and the number of undisclosed account holders receiving such payments.
505 If the QI is required to file IRS Forms 1099, it must file the appropriate form for the type of income paid (e.g., IRS Form 1099-DIV for dividends, IRS Form 1099-INT for interest, and IRS Form 1099-B for broker proceeds).
506 The term reportable amount generally includes those amounts that would be reported on IRS Form 1042-S if the amount were paid to a foreign account holder. The term reportable payment generally refers to amounts subject to backup withholding, but it has a different meaning depending upon the status of the QI as a U.S. or non-U.S. payor.
507 Under both of these procedures, if the QI is a non-U.S. payor, a U.S. non-exempt recipient may effectively avoid disclosure and backup withholding by investing in assets that generate solely non-reportable payments such as foreign source income (such as bonds issued by a foreign government) paid outside of the United States.
508 Rev. Proc. 2002-55, 2002-2 C.B. 435.
509 The U.S. know-your-customer rules are primarily found in the Bank Secrecy Act of 1970 and in Title III, The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 of the USA PATRIOT Act.
510 The term financial institution is broadly defined under 31 U.S.C. sec. 5312(a)(2) or (c)(1) and includes U.S. banks and agencies or branches of foreign banks doing business in the United States, insurance companies, credit unions, brokers and dealers in securities or commodities, money services businesses, and certain casinos.
511 Relevant risks include the types of accounts held at the financial institution, the methods available for opening accounts, the types of customer identification information available, and the size, location, and customer base of the financial institution. 31 C.F.R. sec. 103.121(b)(2).
512 For a person other than an individual the address is the principal place of business, local office, or other physical location. 31 C.F.R. sec. 103.121(b)(2)(i)(3)(iii).
513 For a U.S. person the identification number is the TIN. For a non-U.S. person the identification number could be a TIN, passport number, alien identification number, or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard. 31 C.F.R. sec. 103.121(b)(2)(i)(4).
514 See 31 C.F.R. sec. 103.121(b)(2).
515 For example, a financial institution is not "required to look through trust, escrow, or similar accounts to verify the identities of beneficiaries and instead will only be required to verify the identity of the named accountholder." See 68 Fed. Reg. 25,090, 25,094 (May 9, 2003).
516 See 31 sec. 103.121(b)(2)(ii)(C).
517 In order to assess the risk of the account relationship, a financial institution may need to ascertain the type of business, the purpose of the account, the source of the account funds, and the source of the wealth of the owner or beneficial owner of the entity.
518 31 C.F.R. sec. 103.178. A private banking account is an account that (1) requires a minimum deposit of not less than 1 million dollars; (2) is established for the benefit of one or more non-U.S. persons who are direct or beneficial owners of the account; and (3) is administered or managed by an officer, employee or agent of the financial institution. Beneficial owner for these purposes is defined as an individual who has a level of control over, or entitlement to the funds or assets in the account. 31 C.F.R. secs. 103.175(b), 103.175(o).
519 Directive 2005/60/EC of the European Parliament and of the Council, October 26, 2005 ("EU Third Money Laundering Directive").
520 The directive applies to auditors, accountants, tax advisors, notaries, legal professionals, real estate agents, certain persons trading in goods (cash transactions in excess of EUR 15,000), and casinos.
521 EU Third Money Laundering Directive Art. 3(6)(a). Inquiries into beneficial ownership generally may stop at the level of any owner that is a company listed on a regulated market.
522 EU Third Money Laundering Directive Art. 3(6)(b).
523 EU Third Money Laundering Directive Art. 9.
524 As defined in section 475(c)(2), without regard to the last sentence thereof.
525 As defined in section 475(e)(2).
526 Control for these purposes has the same meaning as control for purposes of section 954(d)(3).
527 Subpart E of Part I of subchapter J of chapter 1.
528 As defined in section 581.
529 As defined in section 856.
530 As defined in section 851.
531 As defined in section 584(a).
532 This includes charitable remainder annuity trusts and charitable remainder unitrusts.
533 This includes certain charitable trusts not exempt under section 501(a).
534 See, for example, the Commentaries on the OECD Model Tax Convention on Income and on Capital, which make clear that individual countries are free to establish procedures for providing any reduced tax rates agreed to by treaty partners. These procedures can include both relief at source and/or full withholding at domestic rates, followed by a refund. See, e.g., Commentary 26.2 to Article 1. Ibid. While Commentary 26.2 notes that a refund mechanism is not the preferred approach, the Act establishes such a mechanism for beneficial owners in certain circumstances. This approach serves to address, in part, observed difficulties in identifying U.S. persons who inappropriately seek treaty benefits to which they are not entitled.
536 An obligation is treated as in registered form if (1) it is registered as to both principal and interest with the issuer (or its agent) and transfer of the obligation may be effected only by surrender of the old instrument and either the reissuance by the issuer of the old instrument to the new holder or the issuance by the issuer of a new instrument to the new holder, (2) the right to principal and stated interest on the obligation may be transferred only through a book entry system maintained by the issuer or its agent, or (3) the obligation is registered as to both principal and interest with the issuer or its agent and may be transferred through both of the foregoing methods. Treas. Reg. sec. 5f.103-1(c).
537 Sec. 163(f)(2)(A). The registration requirement is intended to preserve liquidity while reducing opportunities for noncompliant taxpayers to conceal income and property from the reach of the income, estate and gift taxes. See Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (JCS-38-82), December 31, 1982, p. 190.
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538 Priv. Ltr. Rul. 1993-43-018 (1993); Priv. Ltr. Rul. 1993-43-019 (1993); Priv. Ltr. Rul. 1996-13-002 (1996). The IRS held that the registration requirement may be satisfied by "dematerialized book-entry systems" developed in some foreign countries, even if, under such a system, a holder is entitled to receive a physical certificate, tradable as a bearer instrument, in the event the clearing organization maintaining the system goes out of existence, because "cessation of operation of the book-entry system would be an extraordinary event." Notice 2006-99, 2006-2 C.B. 907.
540 Sec. 103(b)(3). For the purposes of this section, registration-required obligation is any obligation other than one that: (1) is not of a type offered to the public; (2) matures in one year or less; or (3) is a foreign targeted obligation.
544 Secs. 871, 881; Treas. Reg. sec. 1.1441-1(b). Generally, the determination by a withholding agent of the U.S. or foreign status of a payee and of its other relevant characteristics (e.g., as a beneficial owner or intermediary, or as an individual, corporation, or flow-through entity) is made on the basis of a withholding certificate that is a Form W-8 or a Form 8233 (indicating foreign status of the payee or beneficial owner) or a Form W-9 (indicating U.S. status of the payee).
545 Secs. 871(h) and 881(c). Congress believed that the imposition of a withholding tax on portfolio interest paid on debt obligations issued by U.S. persons might impair the ability of U.S. corporations to raise capital in the Eurobond market (i.e., the global market for U.S. dollar-denominated debt obligations). Congress also anticipated that repeal of the withholding tax on portfolio interest would allow the U.S. Treasury Department direct access to the Eurobond market. See Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (JCS-41-84), December 31, 1984, pp. 391-92.
546 In repealing the 30-percent tax on portfolio interest, under the Deficit Reduction Act of 1984, Congress expressed concern about potential compliance problems in connection with obligations issued in bearer form. Given the foreign targeted exception to the registration requirement under section 163(f)(2)(A), U.S. persons intent on evading U.S. tax on interest income might attempt to buy U.S. bearer obligations overseas, claiming to be foreign persons. These persons might then claim the statutory exemption from withholding tax for the interest paid on the obligations and fail to declare the interest income on their U.S. tax returns, without concern that their ownership of the obligations would come to the attention of the IRS. Because of these concerns, Congress expanded the Treasury's authority to require registration of obligations deigned to be sold to foreign persons. See Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (JCS-41-84), December 31, 1984, p. 393.
551 31 U.S.C. sec. 3121(g)(3). For purposes of title 31 of the United States Code, registration-required obligation is defined as any obligation except: (1) an obligation not of a type offered to the public; (2) an obligation having a maturity (at issue) of not more than one year; or (3) a foreign targeted obligation.
552 31 U.S.C. sec. 3121(g)(2).
553 By reason of cross references, this rule will also apply to sections 165(j), 312(m), 871(h), 881(c), 1287 and 4701.
555 See, e.g., Title III of the USA PATRIOT Act, Pub. L. No. 107-56 (October 26, 2001) (sections 351 through 366 amended the Bank Secrecy Act as part of a series of reforms directed at international financing of terrorism).
556 31 U.S.C. sec. 5314. The term "agency" in the Bank Secrecy Act includes financial institutions.
557 31 U.S.C. sec. 5314(a) provides: "Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency."
558 31 C.F.R. sec. 103.27(c). The $10,000 threshold is the aggregate value of all foreign financial accounts in which a U.S. person has a financial interest or over which the U.S. person has signature or other authority.
559 31 U.S.C. sec. 5322 (failure to file is punishable by a fine up to $250,000 and imprisonment for five years, which may double if the violation occurs in conjunction with certain other violations).
560 31 U.S.C. sec. 5321(a)(5).
561 Section 6103 bars disclosure of return information, unless permitted by an exception.
563 Treasury Department Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, and its instructions states:
A financial interest in a bank, securities, or other financial account in a foreign country means an interest described in one of the following three paragraphs: 1. A United States person has a financial interest in each account for which such person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non-United States persons. 2. A United States person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is: (a) a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person; (b) a corporation in which the United States person owns directly or indirectly more than 50 percent of the total value of shares of stock or more than 50 percent of the voting power for all shares of stock; (c) a partnership in which the United States person owns an interest in more than 50 percent of the profits (distributive share of income, taking into account any special allocation agreement) or more than 50 percent of the capital of the partnership; or (d) a trust in which the United States person either has a present beneficial interest, either directly or indirectly, in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income. 3. A United States person has a financial interest in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is a trust, or a person acting on behalf of a trust, that was established by such United States person and for which a trust protector has been appointed. A trust protector is a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee or to replace, or recommend the replacement of, the trustee. Correspondent or "nostro" accounts (international interbank transfer accounts) maintained by banks that are used solely for the purpose of bank-to-bank settlement need not be reported on this form, but are subject to other Bank Secrecy Act filing requirements. This exception is intended to encompass those accounts utilized for bank-to-bank settlement purposes only.
564 See Chief Couns. Adv. 200603026 (January 20, 2006) for a discussion of whether payment card accounts constitute financial accounts.
565 According to the instructions to the FBAR, a person has "signature authority" over an account "if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained." "Other authority" exists in a person "who can exercise comparable power over an account by communication to the bank or other person with whom the account is maintained, either directly or through an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person, either orally or by some other means."
566 Although the revised instructions currently track the language of the statute in stating that a person in or doing business in the United States is within its purview, and thus merely clarify what has long been required, the IRS announced that pending publication of guidance on the scope of the statute, people could rely on the earlier, unrevised instructions to determine whether they are required to file a FBAR. Announcement 2009-51, 2009-25 I.R.B. 1105.
Subsequently, the IRS announced that persons with only signature authority over a foreign financial account as well as for signatories or owners of financial interest in a foreign commingled fund have until June 30, 2010 to file an FBAR for the 2008 and earlier calendar years with respect to those accounts. Notice 2009-62, 2009-35 I.R.B. 260.
567 Notice 2009-62, 2009-35 I.R.B. 260, specifically requested comments concerning: (1) when a person having only signature authority or having an interest in a commingled fund should be relieved of filing an FBAR; (2) the circumstances under which the FBAR filing exceptions for officers and employees of banks and some publicly traded domestic corporations should be expanded; (3) when an interest in a foreign entity should be subject to FBAR reporting; and (4) whether the passive asset and passive income thresholds are appropriate and should apply conjunctively.
569 Form 8858 is used to satisfy reporting requirements of sections 6011, 6012, 6031, 6038, and related regulations.
570 Sec. 6038B. The filing of this form may also be required upon future contributions to the foreign corporation.
571 Treas. Directive 15-14 (December 1, 1992), in which the Secretary delegated to the IRS authority to investigate violations of the Bank Secrecy Act. If the IRS Criminal Investigation Division declines to pursue a possible criminal case, it is to refer the matter to FinCEN for civil enforcement.
573 31 C.F.R. sec. 103.56(g). Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements (April 2, 2003); News Release, IR-2003-48 (April 10, 2003).
574 Secretary of the Treasury, "A Report to Congress in Accordance with sec. 361(b) of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act)" (April 24, 2003).
575 A penalty may be assessed before the end of the six-year period beginning on the date of the transaction with respect to which the penalty is assessed. 31 U.S.C. sec. 5321(b)(1). A civil action for collection may be commenced within two years of the later of the date of assessment and the date a judgment becomes final in any a related criminal action. 31 U.S.C. sec. 5321(b)(2).
576 Sec. 6103(h)(1). In essence, section 6103(h)(1) authorizes officers and employees of both the Treasury Department and IRS to have access to return information on the basis of a "need to know" in order to perform a tax administration function.
578 Internal Revenue Manual, paragraphs 4.26.14.2 and 4.26.14.2.1.
579 American Jobs Creation Act of 2004, Pub. L. No. 108-357, sec. 821(b). This provision is codified in 31 U.S.C. sec. 5321(a)(5).
580 31 U.S.C. sec. 5321(a)(5)(C).
581 31 U.S.C. sec. 5321(a)(5)(B)(i), (ii).
591 If the correct income tax liability exceeds that reported by the taxpayer by the greater of 10 percent of the correct tax or $5,000 (or, in the case of corporations, by the lesser of (1) 10 percent of the correct tax (or, if greater, $10,000) or (2) $10 million), then a substantial understatement exists.
593 Treas. Reg. secs. 1.6662-4(g)(4)(i)(B), 1.6664-4(c).
594 A tax shelter is defined for this purpose as a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement if a significant purpose of such partnership, other entity, plan, or arrangement is the avoidance or evasion of Federal income tax. Sec. 6662(d)(2)(C).
595 Section 6663 imposes a penalty of 75 percent on that portion of the understatement attributable to fraud. If the government proves that such understatement was attributable to fraud, there is a rebuttable presumption that any other understatement is attributable to fraud.
596 Secs. 6011 through 6112 require taxpayers and their advisers to disclose certain transactions determined to have the potential for tax avoidance. All such transactions are referred to as "reportable transactions," and include within that class of transactions, those that are "listed," that is, the subject of published guidance in which the Secretary announces his intent to challenge such transactions.
601 The information reporting requirements identified include sections 6038, 6038A, new 6038D, 6046A, and 6048.
602 Sec. 6501(a). Returns that are filed before the date they are due are deemed filed on the due date. See sec. 6501(b)(1) and (2).
603 Required information reporting subject to this three-year rule is reporting under sections 6038 (certain foreign corporations and partnerships), 6038A (certain foreign-owned corporations), 6038B (certain transfers to foreign persons), 6046 (organizations, reorganizations, and acquisitions of stock of foreign corporations), 6046A (interests in foreign partnerships), and 6048 (certain foreign trusts).
608 Sec. 6501(e)(1)(A)(ii) provides that, in determining whether an amount was omitted, any amounts that are disclosed in the return or in a statement attached to the return in a manner adequate to apprise the Secretary of the nature and amount of such item are not taken into account.
610 This provision was subsequently amended by section 218 of the __ Act of __, Pub. L. No. 111-226, to provide a reasonable cause exception under which the suspension of a limitations period under section 6501(c)(8) may not apply to the entire return. See Part Twelve for a description of the provision.
616 See Instructions to IRS Form 8621. According to the form, reportable elections include the following: (i) an election to treat the PFIC as a QEF; (ii) an election to recognize gain on the deemed sale of a PFIC interest on the first day of the PFIC's tax year as a QEF; (iii) an election to treat an amount equal to the shareholder's post-1986 earnings and profits of a CFC as an excess distribution on the first day of a PFIC's tax year as a QEF that is also a controlled foreign corporation under section 957(a); (iv) an election to extend the time for payment of the shareholder's tax on the undistributed earnings and profits of a QEF; (v) an election to treat as an excess distribution the gain recognized on the deemed sale of the shareholder's interest in the PFIC, or to treat such shareholder's share of the PFIC's post-1986 earnings and profits as an excess distribution, on the last day of its last tax year as a PFIC under section 1297(a) if eligible; or (vi) an election to mark-to-market the PFIC stock that is marketable within the meaning of section 1296(e).
617 Sec. 1291(e) by reference to sec. 1246(f).
618 Prop. Treas. Reg. sec. 1.1291-1(i).
619 Treas. Reg. sec. 1.1441-7(a)(1).
621 Treas. Reg. sec. 1.1461-1(b)(1).
623 Treas. Reg. sec. 1.1461-1(c)(1). IRS Form 1042-S filings provide information important for the Secretary's purposes in properly effecting refund claims and in meeting IRS's obligations under exchange of information agreements with various treaty partners. Also, the IRS has the ability to validate electronically filed Form 1042-S upon such filing, thereby serving to better ensure the reliability of information included in such filings.
624 Ibid. If payments are made to a nominee or representative of a foreign payee, Form 1042-S must also be sent to the beneficial owner of such payments, if known to the withholding agent.
625 Pub. L. No. 105-206 (1998).
626 Partnerships with more than 100 partners are required to file electronically. Sec. 6011(e)(2).
627 For returns filed after 12/31/2010, under the recently enacted Worker, Homeownership, and Business Act of 2009, Pub. L. No. 111-92, any individual tax return, including any return of the tax imposed by subtitle A on individuals, estates, or trusts, prepared by a tax return preparer, is required to be filed electronically unless the tax return preparer reasonably expects to file ten or fewer tax returns during such calendar year. Sec. 6011(e)(3).
629 Sec. 6724(c). If a corporation fails to comply with the electronic filing requirements for more than 250 returns that it is required to file, it may be subject to the penalty for failure to file information returns under section 6721. For partnerships, the penalty may only be imposed if the failure extends to more than 100 returns.
630 See section 1471(d)(5) in section 101 of the Act.
631 The "financial institution" is personally liable for any tax withheld in accordance with section 1461 and section 1474(a) under section 101 of the Act.
632 A trust is a foreign trust if it is not a U.S. person. Sec. 7701(a)(31)(B). A trust is a U.S. person if (1) a U.S. court is able to exercise primary supervision over the administration of the trust, and (2) one or more U.S. persons have the authority to control all substantial decisions of the trust. Sec. 7701(a)(30)(E).
633 Sec. 679(a)(1). This rule does not apply to transfers to trusts established to fund certain deferred compensation plan trusts or to trusts exempt from tax under section 501(c)(3).
636 Treas. Reg. sec. 1.679-2(a)(2)(i).
637 Treas. Reg. sec. 1.679-2(a)(2)(ii).
638 Treas. Reg. sec. 1.679-2(a)(4)(i).
639 Treas. Reg. sec. 1.679-2(a)(4)(ii).
640 Undistributed net income is defined in section 665(a).
642 Treas. Reg. sec. 1.679-2(c)(1).
643 A trust is a foreign trust if it is not a U.S. person. Sec. 7701(a)(31)(B). A trust is a U.S. person if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and (2) one or more U.S. persons have the authority to control all substantial decisions of the trust. Sec. 7701(a)(30)(E).
644 Sec. 679(a)(1). This rule does not apply to transfers to trusts established to fund certain deferred compensation plan trusts or to trusts exempt from tax under section 501(c)(3).
648 A foreign trust for this purpose does not include deferred compensation and charitable trusts described in section 6048(a)(3)(B)(ii).
652 Section 643(i)(2)(B) treats a person as a related person if the relationship between such person would result in a disallowance of losses under sections 267 or 707(b), broadened to include the spouses of members of the family described in such sections.
654 Sec. 7701(a)(30)(E), (31)(B). In addition, for purposes of section 6048, the IRS can classify a trust as foreign if it "has substantial activities, or holds substantial property, outside the United States." Sec. 6048(d)(2).
663 Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b). For purposes of the withholding tax rules applicable to payments to nonresident alien individuals and foreign corporations, a withholding agent is defined broadly to include any U.S. or foreign person that has the control, receipt, custody, disposal, or payment of an item of income of a foreign person subject to withholding. Treas. Reg. sec. 1.1441-7(a).
665 Treas. Reg. sec. 1.863-7(b)(1). A notional principal contract is a financial instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts. Treas. Reg. sec. 1.446-3(c)(1).
666 Treas. Reg. sec. 1.861-3(a)(6). This regulation defines a substitute dividend payment as a payment, made to the transferor of a security in a securities lending transaction or a sale-repurchase transaction, of an amount equivalent to a dividend distribution which the owner of the transferred security is entitled to receive during the term of the transaction.
667 For purposes of the imposition of the 30-percent withholding tax, substitute dividend payments (and substitute interest payments) received by a foreign person under a securities lending or sale-repurchase transaction have the same character as dividend (and interest) income received in respect of the transferred security. Treas. Reg. secs. 1.871-7(b)(2), 1.881-2(b)(2).
668 Notice 97-66, 1997-2 C.B. 328 (December 1, 1997).
669 There is evidence that some taxpayers have taken the position that Notice 97-66 sanctions the elimination of withholding tax in certain situations. See United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, Dividend Tax Abuse: How Offshore Entities Dodge Taxes on U.S. Stock Dividends, Staff Report, September 11, 2008, pp. 18-20, 22-23, 40, 47, 52. In the Obama administration's fiscal year 2010 budget, the Treasury Department has announced that, to address the avoidance of U.S. withholding tax through the use of securities lending transactions, it plans to revoke Notice 97-66 and issue guidance that eliminates the benefits of those transactions but minimizes over-withholding. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals, May 2009, p. 37.
670 Any notional principal contract identified by the Secretary as a specified notional principal contract will be subject to the provision's general effective date described below.
671 However, exceptions to the fungibility principle are provided in particular cases, some of which are described below.
672 One such exception is that the affiliated group for interest allocation purposes includes section 936 corporations (certain electing domestic corporations that have income from the active conduct of a trade or business in Puerto Rico or another U.S. possession) that are excluded from the consolidated group.
673 Temp. Treas. Reg. sec. 1.861-11T(d)(4).
676 Pub. L. No. 108-357, sec. 401.
677 For purposes of determining the assets of the worldwide affiliated group, neither stock in corporations within the group nor indebtedness (including receivables) between members of the group is taken into account.
678 Although the interest expense of a foreign subsidiary is taken into account for purposes of allocating the interest expense of the domestic members of the electing worldwide affiliated group for foreign tax credit limitation purposes, the interest expense incurred by a foreign subsidiary is not deductible on a U.S. return.
679 Indirect ownership is determined under the rules of section 958(a)(2) or through applying rules similar to those of section 958(a)(2) to stock owned directly or indirectly by domestic partnerships, trusts, or estates.
680 See Treas. Reg. sec. 1.904-4(e)(2). a
681 As originally enacted under AJCA, the worldwide interest allocation rules were effective for taxable years beginning after December 31, 2008. However, section 3093 of the Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, delayed the implementation of the worldwide interest allocation rules for two years, until taxable years beginning after December 31, 2010. The implementation of the worldwide interest allocation rules was further delayed by seven years, until taxable years beginning after December 31, 2017, in section 15 of the Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92.
683 Act to extend the Generalized System of Preferences and the Andean Trade Preference Act, and for other purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
684 All the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
685 H.R. 3590. The bill originated as the Service Members Home Ownership Tax Act of 2009 and passed the House on the suspension calendar on October 8, 2009. The House Ways and Means Committee reported H.R. 3200 on October 14, 2009 (H.R. Rep. No. 111-299 (part II)). The Senate Finance Committee reported S. 1796 on October 19, 2009 (S. Rep. No. 111-89). The House passed H.R. 3962 on November 7, 2009. The Senate passed H.R. 3590 with an amendment substituting the text of the Patient Protection and Affordable Care Act on December 24, 2009. The House agreed to the Senate amendment on March 21, 2010. The President signed the bill on March 23, 2010.
686 H.R. 4872. The bill passed the House on March 21, 2010. The Senate passed the bill with amendments on March 25, 2010. The House agreed to the Senate amendments on March 25, 2010. The President signed the bill on March 30, 2010. For a technical explanation of the bills prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of the Revenue Provisions of the "Reconciliation Act of 2010," as Amended, in Combination with the "Patient Protection and Affordable Care Act" (JCX-18-10), March 21, 2010.
687 H.R. 5014. The bill passed the House on the suspension calendar on May 12, 2010. The Senate passed the bill by unanimous consent on May 18, 2010. The President signed the bill on May 27, 2010. Pub. L. No. 111-173, which amends section 5000A(f)(1)(A) of the Code, as added by section 1501(b) of the Patient Protection and Affordable Care Act, is described infra in a footnote in section H of title I of the Patient Protection and Affordable Care Act of Part Eight.
688 H.R. 4994. The bill passed the House on the suspension calendar on April 14, 2010. The Senate passed the bill with amendments by unanimous consent on December 8, 2010. The House agreed to the Senate amendments on the suspension calendar on December 9, 2010. The President signed the bill on December 15, 2010. Pub. L. No. 111-309, which amends section 36B(f)(2)(B) of the Code, is described infra in section C of title I of the Patient Protection and Affordable Care Act of Part Eight.
689 Section 1322 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10104.
692 Secs. 807(b)(2)(B) and (b)(1)(B).
693 Secs. 805(a)(4), 812. Fully deductible dividends from affiliates are excluded from the application of this proration formula (so long as such dividends are not themselves distributions from tax-exempt interest or from dividend income that would not be fully deductible if received directly by the taxpayer). In addition, the proration rule includes in prorated amounts the increase for the taxable year in policy cash values of life insurance policies and annuity and endowment contracts owned by the company (the inside buildup on which is not taxed).
696 Sec. 832(b)(3). In determining premiums earned, the company deducts from gross premiums the increase in unearned premiums for the year (sec. 832(b)(4)(B)). The company is required to reduce the deduction for increases in unearned premiums by 20 percent, reflecting the matching of deferred expenses to deferred income.
698 Certain organizations that operate on a cooperative basis are taxed under special rules set forth in Subchapter T of the Code. The two principal criteria for determining whether an entity is operating on a cooperative basis are: (1) ownership of the cooperative by persons who patronize the cooperative (e.g., the farmer members of a cooperative formed to market the farmers' produce); and (2) return of earnings to patrons in proportion to their patronage. In general, cooperative members are those who participate in the management of the cooperative and who share in patronage capital. For Federal income tax purposes, a cooperative that is taxed under the Subchapter T rules generally computes its income as if it were a taxable corporation, with one exception--the cooperative may deduct from its taxable income distributions of patronage dividends. In general, patronage dividends are the profits of the cooperative that are rebated to its patrons pursuant to a preexisting obligation of the cooperative to do so. Certain farmers' cooperatives described in section 521 are authorized to deduct not only patronage dividends from patronage sources, but also dividends on capital stock and certain distributions to patrons from nonpatronage sources. Separate from the Subchapter T rules, the Code provides tax exemption for certain cooperatives. Section 501(c)(12), for example, provides that certain rural electric and telephone cooperative are exempt from tax under section 501(a), provided that 85 percent or more of the cooperative's income consists of amounts collected from members for the sole purpose of meeting losses or expenses, and certain other requirements are met.
699 When section 501(c)(26) was enacted in 1996, the House Ways and Means Committee, in reporting out the bill, stated as its reasons for change: "The Committee believes that eliminating the uncertainty concerning the eligibility of certain State health insurance risk pools for tax-exempt status will assist States in providing medical care coverage for their uninsured high-risk residents." H.R. Rep. No. 104-496, Part I, "Health Coverage Availability and Affordability Act of 1996," 104th Cong., 2d Sess., March 25, 1996, 124. See also Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 104th Congress (JCS-12-96), December 18, 1996, p. 351.
700 71 T.C. 158 (1978), acq. 1981-2 C.B. 2.
701 985 F.2d 1210 (3rd Cir. 1993), rev'g T.C. Memo. 1991-649.
702 325 F.3d 1188 (10th Cir. 2003).
705 H.R. Rep. No. 99-426, "Tax Reform Act of 1985," Report of the Committee on Ways and Means, 99th Cong., 1st Sess., December 7, 1985, 664. See also Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 584.
706 Section 1341 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10104.
707 Sections 1401, 1411, and 1412 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by sections 10104, 10105, and 10107, are further amended by section 1001 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
712 TEA expanded eligibility for the COBRA subsidy to include individuals who experience a loss of coverage on account of a reduction in hours of employment followed by the involuntary termination of employment of the covered employee. For an individual entitled to COBRA because of a reduction in hours and who is then subsequently involuntarily terminated from employment, the termination is considered a qualifying event for purposes of the COBRA subsidy, as long as the termination occurs during the period beginning on the date following TEA's date of enactment and ending on date of enactment (March 31, 2010).
713 Individuals enrolled in multi-state plans, pursuant to section 1334 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, are also eligible for the credit.
714 Although the credit is generally payable in advance directly to the insurer, individuals may choose to purchase health insurance out-of-pocket and claim the credit at the end of the taxable year. The amount of the reduction in premium is required to be included with each bill sent to the individual.
715 Individuals who are lawfully present in the United States but are not eligible for Medicaid because of their immigration status are treated as having a household income equal to 100 percent of FPL (and thus eligible for the premium assistance credit) as long as their household income does not actually exceed 100 percent of FPL.
716 As described in section 1402 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.
717 As defined in section 1302(b) of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.
718 A similar rule applies to additional benefits that are offered in multi-State plans, under section 1334 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.
719 Those eligible to purchase catastrophic plans either must have not reached the age of 30 before the beginning of the plan year, or have certification of an affordability or hardship exemption from the individual responsibility payment, as described in new sections 5000A(e)(1) and 5000A(e)(5), respectively.
720 As defined in section 5000A(f) of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.
721 The 9.5 percent amount is indexed for calendar years beginning after 2014.
723 Medicare and Medicaid Extenders Act of 2010, Pub. L. No. 111-309, sec. 208.
724 Sections 1401, 1411 and 1412 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10104, is further amended by section 1001 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
729 TEA expanded eligibility for the COBRA subsidy to include individuals who experience a loss of coverage on account of a reduction in hours of employment followed by the involuntary termination of employment of the covered employee. For an individual entitled to COBRA because of a reduction in hours and who is then subsequently involuntarily terminated from employment, the termination is considered a qualifying event for purposes of the COBRA subsidy, as long as the termination occurs during the period beginning on the date following TEA's date of enactment and ending on March 31, 2010.
730 Section 1401 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.
731 As defined in section 1302(b) of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148.
733 Section 1414 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is amended by section 1004 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
737 Section 1421 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is amended by section 10105 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-152.
738 Sec. 162. However, see special rules in sections 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.
742 Sec. 1301 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, provides the requirements for a qualified health plan purchased through the exchange.
743 Section 414(b) provides that, for specified employee benefit purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. There is a similar rule in section 414(c) under which all employees of trades or businesses (whether or not incorporated) which are under common are treated under regulations as employed by a single employer, and, in section 414(m), under which employees of an affiliated service group (as defined in that section) are treated as employed by a single employer. Section 414(n) provides that leased employees, as defined in that section, are treated as employees of the service recipient for specified purposes. Section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the certain requirement under sections 414(m) and (n).
744 Section 1501 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10106, is further amended by section 1002 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
745 10 U.S.C. sec. 55 and 38 U.S.C. sec. 1781.
746 Section 5000A is amended by Pub. L. No. 111-173 to clarify that minimum essential coverage includes any health care program under section 17 or 18 of Title 38 of the United States Code, as determined by the Secretary of Veterans Affairs, in coordination with the Secretary of HHS and the Secretary of Treasury.
750 42 U.S.C. sec. 300gg-91(c)(1). HIPAA excepted benefits include: (1) coverage only for accident, or disability income insurance; (2) coverage issued as a supplement to liability insurance; (3) liability insurance, including general liability insurance and automobile liability insurance; (4) workers' compensation or similar insurance; (5) automobile medical payment insurance; (6) credit-only insurance; (7) coverage for on-site medical clinics; and (8) other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.
751 42 U.S.C. sec. 300gg-91(c)(2-4).
755 Generally, in 2010, the filing threshold is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly. IR-2009-93, Oct. 15, 2009.
756 IRS authority to assess and collect taxes is generally provided in subtitle F, "Procedure and Administration" in the Code. That subtitle establishes the rules governing both how taxpayers are required to report information to the IRS and pay their taxes as well as their rights. It also establishes the duties and authority of the IRS to enforce the Code, including civil and criminal penalties.
757 In the case of an individual participating in a salary reduction arrangement, the taxpayer's household income is increased by any exclusion from gross income for any portion of the required contribution to the premium. The required contribution to the premium is the individual contribution to coverage through an employer or in the purchase of a bronze plan through the Exchange.
758 Generally, in 2010, the filing threshold is $9,350 for a single person or a married person filing separately and is $18,700 for married filing jointly. IR-2009-93, Oct. 15, 2009.
759 Tribal membership is defined in section 45A(c)(6).
766 Sec. 6723. The penalty for failure to comply timely with a specified information reporting requirement is $50 per failure, not to exceed $100,000 for a calendar year.
767 As defined in section 5000A of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10106, as further amended by section 1002 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
768 Section 1513 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10106, is further amended by section 1003 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
769 Sec. 162. However see special rules in sections 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.
772 Rev. Rul. 61-146 (1961-2 CB 25).
773 Prop. Treas. Reg. sec. 1.125-1(m).
775 These rules were added to ERISA and the Code by the Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272.
777 29 C.F.R. section 500.20(s)(1). Under section 5000.20(s)(1), a worker who moves from one seasonal activity to another, while employed in agriculture or performing agricultural labor, is employed on a seasonal basis even though he may continue to be employed during a major portion of the year.
781 Sec. 6723. The penalty for failure to comply timely with a specified information reporting requirement is $50 per failure, not to exceed $100,000 for a calendar year.
782 As defined in section 5000A of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10106, as further amended by section 1002 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
783 For additional information on new section 6051, see the explanation of section 9002 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, "Inclusion of Employer-Sponsored Health Coverage on W-2."
784 For additional information on new section 6055, see the explanation of section 1502 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, "Reporting of Health Insurance Coverage."
785 Sec. 162. However see special rules in sections 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.
788 Prop. Treas. Reg. sec. 1.125-1(b).
793 Prop. Treas. Reg. sec. 1.125-1(q). Long-term care services, contributions to Archer Medical Savings Accounts, group term life insurance for an employee's spouse, child or dependent, and elective deferrals to section 403(b) plans are also nonqualified benefits.
795 Rev. Rul. 61-146, 1961-2 CB 25.
796 Prop. Treas. Reg. sec. 1.125-1(m).
797 Beginning in 2017, each State may allow issuers of health insurance coverage in the large group market in a state to offer qualified plans in the large group market. In that event, a qualified employer includes a small employer that elects to make all its full-time employees eligible for one or more qualified plans offered in the large group market through an Exchange.
801 The requirements do not apply to any governmental plan or any group health plan that has fewer than two participants who are current employees.
806 A specified health insurance policy does not include insurance if substantially all of the coverage provided under such policy consists of excepted benefits described in section 9832(c). Examples of excepted benefits described in section 9832(c) are coverage for only accident, or disability insurance, or any combination thereof; liability insurance, including general liability insurance and automobile liability insurance; workers' compensation or similar insurance; automobile medical payment insurance; coverage for on-site medical clinics; limited scope dental or vision benefits; benefits for long term care, nursing home care, community based care, or any combination thereof; coverage only for a specified disease or illness; hospital indemnity or other fixed indemnity insurance; and Medicare supplemental coverage.
807 Under the provision, the United States includes any possession of the United States.
808 Section 9001 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10901, is further amended by section 1401 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
811 Sec. 162. However see special rules in section 419 and 419A for the deductibility of contributions to welfare benefit plans with respect to medical benefits for employees and their dependents.
813 Sec. 125. Prop. Treas. Reg. sec. 1.125-5 provides rules for Health FSAs. There is a similar type of flexible spending arrangement for dependent care expenses.
814 Sec. 125(d)(2). A cafeteria plan is permitted to allow a grace period not to exceed two and one-half months immediately following the end of the plan year during which unused amounts may be used. Notice 2005-42, 2005-1 C.B. 1204.
815 Guidance with respect to HRAs, including the interaction of FSAs and HRAs in the case of an individual covered under both, is provided in Notice 2002-45, 2002-2 C.B. 93.
816 For 2010, the maximum aggregate annual contribution that can be made to an HSA is $3,050 in the case of self-only coverage and $6,150 in the case of family coverage. The annual contribution limits are increased for individuals who have attained age 55 by the end of the taxable year (referred to as "catch-up contributions"). In the case of policyholders and covered spouses who are age 55 or older, the HSA annual contribution limit is greater than the otherwise applicable limit by $1,000 in 2009 and thereafter. Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.
817 In addition to being limited to self-employed individuals and employees of small employers, the definition of a high deductible health plan for an Archer MSA differs from that for an HSA. After 2007, no new contributions can be made to Archer MSAs except by or on behalf of individuals who previously had made Archer MSA contributions and employees who are employed by a participating employer.
821 A group health plan is defined as a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. The COBRA requirements are enforced through the Code, ERISA, and the PHSA.
824 For purposes of determining the health cost adjustment percentage in 2018 and the age and gender adjusted excess premium amount in any year, in the event the standard Blue Cross/Blue Shield option is not available under the Federal Employees Health Benefit Plan for such year, the Secretary will determine the health cost adjustment percentage by reference to a substantially similar option available under the Federal Employees Health Benefit Plan for that year.
825 See the explanation of section 9002 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, "Inclusion of Cost of Employer Sponsored Health Coverage on W-2."
827 Any portion of employer sponsored coverage that is paid for by the employee with after-tax contributions is included as wages on the W-2 Form.
829 Sec. 213(d). There are certain limitations on the general definition including a rule that cosmetic surgery or similar procedures are generally not medical care.
831 Rev. Rul. 2003-58, 2003-1 CB 959.
834 Sec. 105(b) provides that reimbursements for medical care within the meaning of section 213(d) pursuant to employer-provided health coverage are excludible from gross income. The definition of medical care in section 213(d) does not include the prescription drug limitation in section 213(b).
836 For 2009, the maximum aggregate annual contribution that can be made to an HSA is $3,000 in the case of self-only coverage and $5,950 in the case of family coverage ($3,050 and $6,150 for 2010). The annual contribution limits are increased for individuals who have attained age 55 by the end of the taxable year (referred to as "catch-up contributions"). In the case of policyholders and covered spouses who are age 55 or older, the HSA annual contribution limit is greater than the otherwise applicable limit by $1,000 in 2009 and thereafter. Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.
840 An individual with other coverage in addition to a high deductible health plan is still eligible for an HSA if such other coverage is "permitted insurance" or "permitted coverage." Permitted insurance is: (1) insurance if substantially all of the coverage provided under such insurance relates to (a) liabilities incurred under worker's compensation law, (b) tort liabilities, (c) liabilities relating to ownership or use of property (e.g., auto insurance), or (d) such other similar liabilities as the Secretary may prescribe by regulations; (2) insurance for a specified disease or illness; and (3) insurance that provides a fixed payment for hospitalization. Permitted coverage is coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care. With respect to coverage for years beginning after December 31, 2006, certain coverage under a Health FSA is disregarded in determining eligibility for an HSA.
843 Section 9005 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10902, is further amended by section 1403 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
844 Sec. 106. Health coverage provided to active members of the uniformed services, military retirees, and their dependents are excludable under section 134. That section provides an exclusion for "qualified military benefits," defined as benefits received by reason of status or service as a member of the uniformed services and which were excludable from gross income on September 9, 1986, under any provision of law, regulation, or administrative practice then in effect.
846 Secs. 3121(a)(2), and 3306(a)(2). See also section 3231(e)(1) for a similar rule with respect to compensation for purposes of Railroad Retirement Tax.
852 Prop. Treas. Reg. sec. 1.125-1(q). Long-term care services, contributions to Archer Medical Savings Accounts, group term life insurance for an employee's spouse, child or dependent, and elective deferrals to section 403(b) plans are also nonqualified benefits.
853 Sec. 125 and Prop. Treas. Reg. sec. 1.125-5.
854 Sec. 125(d)(2) and Prop. Treas. Reg. sec. 1.125-5(c).
855 Notice 2005-42, 2005-1 C.B. 1204 and Prop. Treas. Reg. sec. 1.125-1(e).
856 Prop. Treas. Reg. sec. 1-125-5(b).
857 Sec. 106(c)(2) and Prop. Treas. Reg. sec. 1.125-5(a).
858 Guidance with respect to HRAs, including the interaction of FSAs and HRAs in the case of an individual covered under both, is provided in Notice 2002-45, 2002-2 C.B. 93.
859 The provision does not change the present law treatment as described in Prop. Treas. Reg. section 1.125-5 for dependent care flexible spending arrangements or adoption assistance flexible spending arrangements.
860 Section 414(b) provides that, for specified employee benefit purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. There is a similar rule in section 414(c) under which all employees of trades or businesses (whether or not incorporated) which are under common control are treated under regulations as employed by a single employer, and, in section 414(m), under which employees of an affiliated service group (as defined in that section) are treated as employed by a single employer. Section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the requirements under section 414(m). Section 125(g)(4) applies this rule to cafeteria plans.
861 This description is based upon the discussion at page 334 in S. Rep. No. 111-89, Final Committee Report of the Senate Finance Committee on "America's Healthy Future Act of 2009," published October 21, 2009.
863 Sec. 6041(a). The information return is generally submitted electronically as a Form-1099 or Form-1096, although certain payments to beneficiaries or employees may require use of Forms W-3 or W-2, respectively. Treas. Reg. sec. 1.6041-1(a)(2).
864 Sec. 6041(a) requires reporting as to "other fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(c), 6049(a) or 6050N(a) applies and other than payments with respect to which a statement is required under authority of section 6042(a), 6044(a)(2) or 6045)[.]" These excepted payments include most interest, royalties, and dividends.
866 Treas. Reg. sec. 1.6041-3(p). Certain for-profit health provider corporations are not covered by this general exception, including those organizations providing billing services for such companies.
869 Sec. 6045(f)(1) and (2); Treas. Reg. secs. 1.6041-1(d)(2) and 1.6045-5(d)(5).
873 Sec. 6721. The penalty for the failure to file an information return generally is $50 for each return for which such failure occurs. The total penalty imposed on a person for all failures during a calendar year cannot exceed $250,000. Additionally, special rules apply to reduce the per-failure and maximum penalty where the failure is corrected within a specified period.
874 Sec. 6722. The penalty for failure to provide a correct payee statement is $50 for each statement with respect to which such failure occurs, with the total penalty for a calendar year not to exceed $100,000. Special rules apply that increase the per-statement and total penalties where there is intentional disregard of the requirement to furnish a payee statement.
875 Sec. 6723. The penalty for failure to timely comply with a specified information reporting requirement is $50 per failure, not to exceed $100,000 for a calendar year.
876 Secs. 6042 (dividends), 6045 (broker reporting) and 6049 (interest) and the Treasury regulations thereunder.
877 See Treas. Reg. sec. 31.3406(h)-3.
878 Section 9007 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is amended by section 10903 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-152.
881 Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
882 Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
883 Although nonprofit hospitals generally are recognized as tax-exempt by virtue of being "charitable" organizations, some might qualify for exemption as educational or scientific organizations because they are organized and operated primarily for medical education and research purposes.
884 Rev. Rul. 69-545, 1969-2 C.B. 117; see also Restatement (Second) of Trusts secs. 368, 372 (1959); see Bruce R. Hopkins, The Law of Tax-Exempt Organizations, sec. 6.3 (8th ed. 2003) (discussing various forms of health-care providers that may qualify for exemption under section 501(c)(3)).
885 Rev. Rul. 69-545, 1969-2 C.B. 117. From 1956 until 1969, the IRS applied a "financial ability" standard, requiring that a charitable hospital be "operated to the extent of its financial ability for those not able to pay for the services rendered and not exclusively for those who are able and expected to pay." Rev. Rul. 56-185, 1956-1 C.B. 202.
889 Secs. 170, 2055, and 2522, respectively.
890 Sec. 6033(a). An organization that has not received a determination of its tax-exempt status, but that claims tax-exempt status under section 501(a), is subject to the same annual reporting requirements and exceptions as organizations that have received a tax-exemption determination.
891 Social welfare organizations, labor organizations, agricultural organizations, horticultural organizations, and business leagues are subject to the generally applicable Form 990, Form 990-EZ, and Form 990-T annual filing requirements.
893 Sec. 6104(d)(4); Treas. Reg. sec. 301.6104(d)-2(b).
894 No inference is intended regarding whether an organization satisfies the present law community benefit standard.
896 For example, assume the date of enactment is April 1, 2010. A calendar year taxpayer would test whether it meets the community health needs assessment requirement in the taxable year ending December 31, 2013. To avoid the penalty, the taxpayer must have satisfied the community health needs assessment requirements in 2011, 2012, or 2013.
897 Section 9008 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is amended by section 1404 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
898 See 2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, available at http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf.
899 Notice 2010-71 provided initial guidance on the annual fee imposed under this provision, including procedures for filing Form 8947, Report of Branded Prescription Drug Information. Notice 2011-9 supersedes Notice 2010-71 and provides guidance on the methodology that will be used for calculating the allocation of the branded prescription drug fee and requests public comments.
900 Section 9009 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is repealed by section 1405(d) of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
901 Section 9010 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10905, is further amended by section 1406 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
904 See Helvering v. Le Gierse, 312 U.S. 531 (1941).
905 The exempt activities for this purpose are activities other than activities of an unrelated trade or business defined in section 513.
906 Section 501(m) of the Code provides that an organization described in section 501(c)(3) or (4) is exempt from Federal income tax only if no substantial part of its activities consists of providing commercial-type insurance. Thus, an organization otherwise described in section 501(c)(3) or (4) that is taxable (under the Federal income tax rules) by reason of section 501(m) is not eligible for the 50-percent exclusion under the insurance fee.
907 Section 9012 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is amended by section 1407 of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152.
908 The identity of the plan sponsor is determined in accordance with section 16(B) of ERISA, except that for cases where a plan is maintained jointly by one employer and an employee organization, and the employer is the primary source of financing, the employer is the plan sponsor.
909 Sec. 1860D-22 of the Social Security Act (SSA), 42 U.S.C. sec. 1395w-132.
910 Employment-based retiree health coverage is health insurance coverage or other coverage of health care costs (whether provided by voluntary insurance coverage or pursuant to statutory or contractual obligation) for Medicare Part D eligible individuals (their spouses and dependents) under group health plans based on their status as retired participants in such plans. For purposes of the subsidy, group health plans generally include employee welfare benefit plans (as defined in section 607(1) of ERISA) that provide medical care (as defined in section 213(d)), Federal and State governmental plans, collectively bargained plans, and church plans.
911 In addition to meeting the actuarial value standard, the plan sponsor must also maintain and provide the Secretary of HHS access to records that meet the Secretary of HHS's requirements for purposes of audits and other oversight activities necessary to ensure the adequacy of prescription drug coverage and the accuracy of payments made to eligible individuals under the plan. In addition, the plan sponsor must disclose to the Secretary of HHS whether the plan meets the actuarial equivalence requirement and if it does not, must disclose to retirees the limitations of their ability to enroll in Medicare Part D and that non-creditable coverage enrollment is subject to penalties such as fees for late enrollment. 42 U.S.C. sec. 1395w-132(a)(2).
913 For purposes of calculating allowable retiree costs, actual costs paid are net of discounts, chargebacks, and average percentage rebates, and exclude administrative costs.
914http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/Downloads/Announcement2010.pdf. Retrieved on March 19, 2010.
915 Sec. 265(a) and Treas. Reg. sec. 1.265-1(a).
917 A corporation is treated as publicly held if it has a class of common equity securities that is required to be registered under section 12 of the Securities Exchange Act of 1934.
918 Sec. 162(m). This deduction limitation applies for purposes of the regular income tax and the alternative minimum tax.
919 Notice 2007-49, 2007-25 I.R.B. 1429.
922 The determination of the three highest compensated officers is made on the basis of the shareholder disclosure rules for compensation under the Exchange Act, except to the extent that the shareholder disclosure rules are inconsistent with the provision. Such shareholder disclosure rules are applied without regard to whether those rules actually apply to the employer under the Exchange Act. If an employee is a covered executive with respect to an applicable employer for any applicable taxable year, the employee will be treated as a covered executive for all subsequent applicable taxable years (and will be treated as a covered executive for purposes of any subsequent taxable year for purposes of the special rule for deferred deduction executive remuneration).
923 Section 9015 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, is amended by section 10906.
927 For purposes of computing net earnings from self employment, taxpayers are permitted a deduction equal to the product of the taxpayer's earnings (determined without regard to this deduction) and one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee's wages, which do not include FICA taxes paid by the employer, whereas the self-employed individual's net earnings are economically equivalent to an employee's wages plus the employer share of FICA taxes.
930 See H. Rep. 99-426, Tax Reform Act of 1985, (December 7, 1985), p. 664. The Committee stated, "[T]he availability of tax-exempt status under [then-]present law has allowed some large insurance entities to compete directly with commercial insurance companies. For example, the Blue Cross/Blue Shield organizations historically have been treated as tax-exempt organizations described in sections 501(c)(3) or (4). This group of organizations is now among the largest health care insurers in the United States." See also Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-10-87 (May 4, 1987), pp. 583-592.
931 See Wednesday, March 24, 2010, Senate Floor statement of Senator Baucus relating to this provision, 156 Cong. Rec. S1989, stating in part, "First, it was our intention that, in calculating the medical loss ratios, these entities could include both the cost of reimbursement for clinical services provided to the individuals they insure and the cost of activities that improve health care quality. Determining the medical loss ratio under this provision using those two types of costs is consistent with the calculation of medical loss ratios elsewhere in the legislation. This determination would be made on an annual basis and would only affect the application of the special deductions for that year. Second, it was our intention that the only consequence for not meeting the medical loss ratio threshold would be that the 25 percent deduction for claims and expenses and the exception from the 20 percent reduction in the deduction for unearned premium reserves would not be allowed. The entity would still be treated as a stock property and casualty insurance company." A technical correction may be necessary so that the statute reflects this intent.
932 Section 9017 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, as amended by section 10907.
936 Secs. 104, 105, 106, 125. A similar rule excludes employer provided health insurance coverage and reimbursements for medical expenses from the employees' wages for payroll tax purposes under sections 3121(a)(2), and 3306(a)(2). Health coverage provided to active members of the uniformed services, military retirees, and their dependents are excludable under section 134. That section provides an exclusion for "qualified military benefits," defined as benefits received by reason of status or service as a member of the uniformed services and which were excludable from gross income on September 9, 1986, under any provision of law, regulation, or administrative practice then in effect.
938 See, e.g., Rev. Rul. 78-170, 1978-1 C.B. 24 (government payments to assist low-income persons with utility costs are not income); Rev. Rul. 76-395, 1976-2 C.B. 16, 17 (government grants to assist low-income city inhabitants to refurbish homes are not income); Rev. Rul. 76-144, 1976-1 C.B. 17 (government grants to persons eligible for relief under the Disaster Relief Act of 1974 are not income); Rev. Rul. 74-153, 1974-1 C.B. 20 (government payments to assist adoptive parents with support and maintenance of adoptive children are not income); Rev. Rul. 74-205, 1974-1 C.B. 20 (replacement housing payments received by individuals under the Housing and Urban Development Act of 1968 are not includible in gross income); Gen. Couns. Mem. 34506 (May 26, 1971) (federal mortgage assistance payments excluded from income under general welfare exception); Rev. Rul. 57-102, 1957-1 C.B. 26 (government benefits paid to blind persons are not income). The courts have also acknowledged the existence of this doctrine. See, e.g., Bailey v. Commissioner, 88 T.C. 1293, 1299-1301 (1987) (new building facade paid for by urban renewal agency on taxpayer's property under facade grant program not considered payments under general welfare doctrine because awarded without regard to any need of the recipients); Graff v. Commissioner, 74 TC 743, 753-754 (1980) (court acknowledged that rental subsidies under Housing Act were excludable under general welfare doctrine but found that payments at issue made by HUD on taxpayer landlord's behalf were taxable income to him), affd. per curiam 673 F.2d 784 (5th Cir. 1982).
939 See Rev. Rul. 98-19, 1998-1 C.B. 840 (excluding relocation payments made by local governments to those whose homes were damaged by floods). Recent guidance as to whether the need of the recipient (taken into account under the second requirement of the general welfare exclusion) must be based solely on financial means or whether the need can be based on a variety of other considerations including health, educational background, or employment status, has been mixed. Chief Couns. Adv. 200021036 (May 25, 2000) (excluding state adoption assistant payments made to individuals adopting special needs children without regard to financial means of parents; the children were considered to be the recipients); Priv. Ltr. Rul. 200632005 (April 13, 2006) (excluding payments made by Tribe to members based on multiple factors of need pursuant to housing assistance program); Chief Couns. Adv. 200648027 (Jul 25, 2006) (excluding subsidy payments based on financial need of recipient made by state to certain participants in state health insurance program to reduce cost of health insurance premiums).
940 Testimony of Sarah H. Ingram, Commissioner, Tax Exempt and Government Entities, Internal Revenue Service, before the Senate Committee on Indian Affairs, Oversight Hearing to Examine the Federal Tax Treatment of Health Care Benefits Provided by Tribal Governments to Their Citizens, September 17, 2009.
942 The term "Indian tribe" means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village, or regional or village corporation, as defined by, or established pursuant to, the Alaska Native Claims Settlement Act (43 U.S.C. 1601 et seq.), which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians. The term "tribal organization" has the same meaning as such term in section 4(l) of the Indian Self-Determination and Education Assistance Act (25 U.S.C. 450b(1)).
943 The terms "accident or health insurance" and "accident or health plan" have the same meaning as when used in section 105. The term "medical care" is the same as the definition under section 213. For purposes of the provision, dependents are determined under section 152, but without regard to subsections (b)(1), (b)(2), and (d)(1)(B). Section 152(b)(1) generally provides that if an individual is a dependent of another taxpayer during a taxable year such individual is treated as having no dependents for such taxable year. Section 152(b)(2) provides that a married individual filing a joint return with his or her spouse is not treated as a dependent of a taxpayer. Section 152(d)(1)(B) provides that a "qualifying relative" (i.e., a relative that qualifies as a dependent) does not include a person whose gross income for the calendar year in which the taxable year begins equals or exceeds the exempt amount (as defined under section 151).
945 Prop. Treas. Reg. sec. 1.125-1(b).
950 Prop. Treas. Reg. sec. 1.125-1(q). Long-term care services, contributions to Archer Medical Savings Accounts, group term life insurance for an employee's spouse, child or dependent, and elective deferrals to section 403(b) plans are also nonqualified benefits.
952 A key employee generally is an employee who, at any time during the year is (1) a five-percent owner of the employer, or (2) a one-percent owner with compensation of more than $150,000 (not indexed for inflation), or (3) an officer with compensation more than $160,000 (for 2010). A special rule limits the number of officers treated as key employees. If the employer is a corporation, a five-percent owner is a person who owns more than five percent of the outstanding stock or stock possessing more than five percent of the total combined voting power of all stock. If the employer is not a corporation, a five-percent owner is a person who owns more than five percent of the capital or profits interest. A one-percent owner is determined by substituting one percent for five percent in the preceding definitions. For purposes of determining employee ownership in the employer, certain attribution rules apply.
953 For cafeteria plan purposes, a "highly compensated individual" is (1) an officer, (2) a five-percent shareholder, (3) an individual who is highly compensated, or (4) the spouse or dependent of any of the preceding categories. A "highly compensated participant" is a participant who falls in any of those categories. "Highly compensated" is not defined for this purpose. Under section 105(h), a self-insured medical expense reimbursement plan must not discriminate in favor of a "highly compensated individual," defined as (1) one of the five highest paid officers, (2) a 10-percent shareholder, or (3) an individual among the highest paid 25 percent of all employees. Under section 129 for a dependent care assistance program, eligibility for benefits, and the benefits and contributions provided, generally must not discriminate in favor of highly compensated employees within the meaning of section 414(q).
954 Section 414(q) generally defines a highly compensated employee as an employee (1) who was a five-percent owner during the year or the preceding year, or (2) who had compensation of $110,000 (for 2010) or more for the preceding year. An employer may elect to limit the employees treated as highly compensated employees based upon their compensation in the preceding year to the highest paid 20 percent of employees in the preceding year. Five-percent owner is defined by cross-reference to the definition of key employee in section 416(i).
955 Section 52(b) provides that, for specified purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. However, section 52(b) provides certain modifications to the control group rules including substituting 50 percent ownership for 80 percent ownership as the measure of control. There is a similar rule in section 52(c) under which all employees of trades or businesses (whether or not incorporated) which are under common control are treated under regulations as employed by a single employer. Section 414(n) provides rules for specified purposes when leased employees are treated as employed by the service recipient and section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the requirements of section 414(n).
958 Sec. 41(h). The research credit, including the university basic research credit and the energy research credit, was extended for two years through 2011, in section 731 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
959 Under a special rule, 75 percent of amounts paid to a research consortium for qualified research are treated as qualified research expenses eligible for the research credit (rather than 65 percent under the general rule of section 41(b)(3) governing contract research expenses) if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6) and is organized and operated primarily to conduct scientific research, and (2) such qualified research is conducted by the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
961 The number of employees is determined taking into account all businesses of the taxpayer at the time it submits an application, and is determined taking into account the rules for determining a single employer under section 52(a) or (b) or section 414(m) or (o).
962 The Secretary must take action to approve or deny an application within 30 days of the submission of such application.
963 Any expenses for the taxable year that are qualified research expenses under section 41(b) are taken into account in determining base period research expenses for purposes of computing the research credit under section 41 for subsequent taxable years.
964 For example, if an employer offering the same plans for $200 and $300 offers a flat $180 contribution for all plans, a contribution of 90 percent for the $200 plan and a contribution of 60 percent for the $300 plan, and the value of the voucher would equal the value of the contribution to the $200 since it received a 90 percent contribution, a value of $180. However, if the firm offers a $150 contribution to the $200 plan (75 percent) and a $200 contribution to the $300 plan (67 percent), the value of the voucher is based on the plan receiving the greater percentage paid by the employer and would be $150. If a firm offers health plans with monthly premiums of $200 and $300 and provides a payment of 60 percent of any plan purchased, the value of the voucher will be 60 percent the higher premium plan, in this case, 60 percent of $300 or $180.
965 Section 1513 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, and new Code section 4980H.
966 "EGTRRA" refers to the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16.
967 Section 101(b) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 terminated the amendments made by this provision for taxable years beginning after December 31, 2011, without regard to the EGTRRA sunset.
971 Generally, same-sex partners do not qualify as dependents under section 152. In addition, same-sex partners are not recognized as spouses for purposes of the Code. The Defense of Marriage Act, Pub. L. No. 104-199.
972 Secs. 419(e) and 501(c)(9).
973 Sec. 152(f)(1). Under section 152(f)(1), a legally adopted child of the taxpayer or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer is treated as a child of the taxpayer by blood.
974 For purposes of computing net earnings from self employment, taxpayers are permitted a deduction equal to the product of the taxpayer's earnings (determined without regard to this deduction) and one-half of the sum of the rates for OASDI tax (12.4 percent) and HI tax (2.9 percent), i.e., 7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee's wages, which do not include FICA taxes paid by the employer, whereas the self-employed individual's net earnings are economically equivalent to an employee's wages plus the employer share of FICA taxes.
975 Gross income does not include items, such as interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence, which are excluded from gross income under the income tax.
976 For this purpose, a business of trading financial instruments or commodities is not treated as an active trade or business.
977 The excise tax on medical devices as imposed by this provision replaces the annual fee on medical device manufacturers and importers under section 9009 of the Patient Protection and Affordable Care Act.
985 21 U.S.C. 321. Section 201(h) defines device as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is (1) recognized in the official National Formulary, or the United States Pharmacopeia, or any supplement to them, (2) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or (3) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes.
986 Medical device classifications are found in Title 21 of the Code of Federal Regulations, Parts 862-892.
987 In the case of cellulosic biofuel that is alcohol, the $1.01 credit amount is reduced by the credit amount of the alcohol mixture credit, and for ethanol, the credit amount for small ethanol producers, as in effect at the time the cellulosic biofuel fuel is produced.
988 See secs. 40A(d)(1), 40A(f)(3), and 6426(h).
989 Chief Couns. Adv. 200941011 (June 30, 2009). The Code provides for a tax credit of 50 cents for each gallon of alternative fuel used to produce an alternative fuel mixture that is used or sold for use as a fuel. (sec. 6426(e)). Under Notice 2006-92, an alternative fuel mixture is a mixture of alternative fuel and a taxable fuel (such as diesel) that contains at least 0.1 percent taxable fuel. Liquid fuel derived from biomass is an alternative fuel (sec. 6426(d)(2)(G)). Diesel fuel has been added to black liquor to qualify for the alternative mixture credit and the mixture is burned in a recovery boiler as fuel. Persons that have an alternative fuel mixture credit amount in excess of their taxable fuel excise tax liability may make a claim for payment from the Treasury in the amount of the excess.
990 See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 1017 (1999); Klamath Strategic Investment Fund, LLC v. United States, 472 F. Supp. 2d 885 (E.D. Texas 2007), aff'd 568 F.3d 537 (5th Cir. 2009); Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), vacating and remanding 62 Fed. Cl. 716 (2004) (slip opinion pp. 123-124, 128); cert. denied, 127 S. Ct. 1261 (Mem.) (2007). Closely related doctrines also applied by the courts (sometimes interchangeable with the economic substance doctrine) include the "sham transaction doctrine" and the "business purpose doctrine." See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) (denying interest deductions on a "sham transaction" that lacked "commercial economic substance"). Certain "substance over form" cases involving tax-indifferent parties, in which courts have found that the substance of the transaction did not comport with the form asserted by the taxpayer, have also involved examination of whether the change in economic position that occurred, if any, was consistent with the form asserted, and whether the claimed business purpose supported the particular tax benefits that were claimed. See, e.g., TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006); BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007), aff'd 523 F.3d 461 (4th Cir. 2008). Although the Second Circuit found for the government in TIFD III-E, Inc., on remand to consider issues under section 704(e), the District Court found for the taxpayer. See, TIFD III-E Inc. v. United States, No. 3:01-cv-01839, 2009 WL 3208650 (D. Conn. Oct. 23, 2009).
991 ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
992 See, ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
993 "The casebooks are glutted with [economic substance] tests. Many such tests proliferate because they give the comforting illusion of consistency and precision. They often obscure rather than clarify." Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).
994 See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th Cir. 1993) ("The threshold question is whether the transaction has economic substance. If the answer is yes, the question becomes whether the taxpayer was motivated by profit to participate in the transaction."). See also, Klamath Strategic Investment Fund v. United States, 568 F. 3d 537, (5th Cir. 2009) (even if taxpayers may have had a profit motive, a transaction was disregarded where it did not in fact have any realistic possibility of profit and funding was never at risk).
995 See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 91-92 (4th Cir. 1985) ("To treat a transaction as a sham, the court must find that the taxpayer was motivated by no business purposes other than obtaining tax benefits in entering the transaction, and, second, that the transaction has no economic substance because no reasonable possibility of a profit exists."); IES Industries v. United States, 253 F.3d 350, 358 (8th Cir. 2001) ("In determining whether a transaction is a sham for tax purposes [under the Eighth Circuit test], a transaction will be characterized as a sham if it is not motivated by any economic purpose outside of tax considerations (the business purpose test), and if it is without economic substance because no real potential for profit exists (the economic substance test)."). As noted earlier, the economic substance doctrine and the sham transaction doctrine are similar and sometimes are applied interchangeably. For a more detailed discussion of the sham transaction doctrine, see, e.g., Joint Committee on Taxation, Study of Present-Law Penalty and Interest Provisions as Required by Section 3801 of the Internal Revenue Service Restructuring and Reform Act of 1998 (including Provisions Relating to Corporate Tax Shelters (JCS-3-99), p. 182.
996 See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v. Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) ("Instead, the consideration of business purpose and economic substance are simply more precise factors to consider . . . We have repeatedly and carefully noted that this formulation cannot be used as a `rigid two-step analysis'.")
997 Coltec Industries, Inc. v. United States, 62 Fed. Cl. 716 (2004) (slip opinion at 123-124, 128); vacated and remanded, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 1261 (Mem.) (2007).
998 The Federal Circuit Court stated that "when the taxpayer claims a deduction, it is the taxpayer who bears the burden of proving that the transaction has economic substance." The Federal Circuit Court quoted a decision of its predecessor court, stating that "Gregory v. Helvering requires that a taxpayer carry an unusually heavy burden when he attempts to demonstrate that Congress intended to give favorable tax treatment to the kind of transaction that would never occur absent the motive of tax avoidance." The Court also stated that "while the taxpayer's subjective motivation may be pertinent to the existence of a tax avoidance purpose, all courts have looked to the objective reality of a transaction in assessing its economic substance." Coltec Industries, Inc. v. United States, 454 F.3d at 1355, 1356.
999 See, e.g., Coltec Industries v. United States, 454 F.3d 1340 (Fed. Cir. 2006). The court analyzed the transfer to a subsidiary of a note purporting to provide high stock basis in exchange for a purported assumption of liabilities, and held these transactions unnecessary to accomplish any business purpose of using a subsidiary to manage asbestos liabilities. The court also held that the purported business purpose of adding a barrier to veil-piercing claims by third parties was not accomplished by the transaction. 454 F.3d at 1358-1360 (Fed. Cir. 2006).
1000 See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an unprofitable, leveraged acquisition of Treasury bills, and accompanying prepaid interest deduction, lacked economic substance).
1001 See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 (disallowing deduction even though taxpayer had a possibility of small gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 T.C. 738, 768 (1990) (stating that "potential for gain . . . is infinitesimally nominal and vastly insignificant when considered in comparison with the claimed deductions").
1002 See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 94 (4th Cir. 1985) (the economic substance inquiry requires an objective determination of whether a reasonable possibility of profit from the transaction existed apart from tax benefits); Compaq Computer Corp. v. Commissioner, 277 F.3d 778, 781 (5th Cir. 2001) (applied the same test, citing Rice's Toyota World); IES Industries v. United States, 253 F.3d 350, 354 (8th Cir. 2001); Wells Fargo & Company v. United States, No. 06-628T, 2010 WL 94544, at *57-58 (Fed. Cl. Jan. 8, 2010).
1003 See American Electric Power, Inc. v. United States, 136 F. Supp. 2d 762, 791-92 (S.D. Ohio 2001), aff'd, 326 F.3d.737 (6th Cir. 2003) and Wells Fargo & Company v. United States, No. 06-628T, 2010 WL 94544, at *59 (Fed. Cl. Jan. 8, 2010).
1004 See, e.g., Joint Committee on Taxation, Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JSC-3-03), February, 2003 ("Enron Report"), Volume III at C-93, 289. Enron Corporation relied on Frank Lyon Co. v. United States, 435 U.S. 561, 577-78 (1978), and Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir. 1990), to argue that financial accounting benefits arising from tax savings constitute a good business purpose.
1005 See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 1017 (1999).
1006 See, e.g., TIFD III-E, Inc. v. United States, 459 F.3d 220 (2d Cir. 2006). Although the Second Circuit found for the government in TIFD III-E, Inc., on remand to consider issues under section 704(e), the District Court found for the taxpayer. See, TIFD III-E Inc. v. United States, No. 3:01-cv-01839, 2009 WL 3208650 (Oct. 23, 2009).
1008 A tax shelter is defined for this purpose as a partnership or other entity, an investment plan or arrangement, or any other plan or arrangement if a significant purpose of such partnership, other entity, plan, or arrangement is the avoidance or evasion of Federal income tax. Sec. 6662(d)(2)(C).
1010 Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 1.6664-4(c).
1011 See Treas. Reg. Sec. 1.6664-4(c). In addition to the requirements applicable to taxpayers under the regulations, advisors may be subject to potential penalties under section 6694 (applicable to return preparers), and to monetary penalties and other sanctions under Circular 230 (which provides rules governing persons practicing before the IRS). Under Circular 230, if a transaction is a "covered transaction" (a term that includes listed transactions and certain non-listed reportable transactions) a "more likely than not" confidence level is required for written tax advice that may be relied upon by a taxpayer for the purpose of avoiding penalties, and certain other standards must also be met. Treasury Dept. Circular 230 (Rev. 4-2008) Sec. 10.35. For other tax advice, Circular 230 generally requires a lower "realistic possibility" confidence level or a "non-frivolous" confidence level coupled with advising the client of any opportunity to avoid the accuracy related penalty under section 6662 by adequate disclosure. Treasury Dept. Circular 230 (Rev. 4-2008) Sec. 10.34.
1016 Section 6664(d)(3)(B) does not allow a reasonable belief to be based on a "disqualified opinion" or on an opinion from a "disqualified tax advisor."
1021 For this purpose, any reduction in the excess of deductions allowed for the taxable year over gross income for such year, and any reduction in the amount of capital losses which would (without regard to section 1211) be allowed for such year, will be treated as an increase in taxable income. Sec. 6662A(b).
1023 See the previous discussion regarding the penalty for failing to disclose a reportable transaction.
1025 The term "material advisor" means any person who provides any material aid, assistance, or advice with respect to organizing, managing, promoting, selling, implementing, or carrying out any reportable transaction, and who derives gross income in excess of $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons ($250,000 in any other case). Sec. 6111(b)(1). $50,000 in the case of a reportable transaction substantially all of the tax benefits from which are provided to natural persons ($250,000 in any other case). Sec. 6111(b)(1).
1026 This situation could arise, for example, when an advisor has an arrangement or understanding (oral or written) with an organizer, manager, or promoter of a reportable transaction that such party will recommend or refer potential participants to the advisor for an opinion regarding the tax treatment of the transaction.
1027 An advisor should not be treated as participating in the organization of a transaction if the advisor's only involvement with respect to the organization of the transaction is the rendering of an opinion regarding the tax consequences of such transaction. However, such an advisor may be a "disqualified tax advisor" with respect to the transaction if the advisor participates in the management, promotion, or sale of the transaction (or if the advisor is compensated by a material advisor, has a fee arrangement that is contingent on the tax benefits of the transaction, or as determined by the Secretary, has a continuing financial interest with respect to the transaction). See Notice 2005-12, 2005-1 C.B. 494, regarding disqualified compensation arrangements.
1028 Sec. 6662(b) (flush language). In addition, section 6662(b) provides that section 6662 does not apply to any portion of an underpayment on which a fraud penalty is imposed under section 6663.
1030 Sec. 6662(d)(2)(A) (flush language).
1033 The term "transaction" includes a series of transactions.
1034 If the realization of the tax benefits of a transaction is consistent with the Congressional purpose or plan that the tax benefits were designed by Congress to effectuate, it is not intended that such tax benefits be disallowed. See, e.g., Treas. Reg. sec. 1.269-2, stating that characteristic of circumstances in which an amount otherwise constituting a deduction, credit, or other allowance is not available are those in which the effect of the deduction, credit, or other allowance would be to distort the liability of the particular taxpayer when the essential nature of the transaction or situation is examined in the light of the basic purpose or plan which the deduction, credit, or other allowance was designed by the Congress to effectuate. Thus, for example, it is not intended that a tax credit (e.g., section 42 (low-income housing credit), section 45 (production tax credit), section 45D (new markets tax credit), section 47 (rehabilitation credit), section 48 (energy credit), etc.) be disallowed in a transaction pursuant to which, in form and substance, a taxpayer makes the type of investment or undertakes the type of activity that the credit was intended to encourage.
1035 The examples are illustrative and not exclusive.
1036 See, e.g., John Kelley Co. v. Commissioner, 326 U.S. 521 (1946) (respecting debt characterization in one case and not in the other, based on all the facts and circumstances).
1037 See, e.g., Sam Siegel v. Commissioner, 45. T.C. 566 (1966), acq. 1966-2 C.B. 3. But see Commissioner v. Bollinger, 485 U.S. 340 (1988) (agency principles applied to title-holding corporation under the facts and circumstances).
1038 See, e.g., Rev. Proc. 2010-3 2010-1 I.R.B. 110, Secs. 3.01(38), (39), (40), and (42) (IRS will not rule on certain matters relating to incorporations or reorganizations unless there is a "significant issue"); compare Gregory v. Helvering. 293 U.S. 465 (1935).
1039 See, e.g., National Carbide v. Commissioner, 336 U.S. 422 (1949), Moline Properties v. Commissioner, 319 U.S. 435 (1943); compare, e.g. Aiken Industries, Inc. v. Commissioner, 56 T.C. 925 (1971), acq., 1972-2 C.B. 1; Commissioner v. Bollinger, 485 U.S. 340 (1988); see also sec. 7701(l).
1040 See, e.g., Frank Lyon Co. v. Commissioner, 435 U.S. 561 (1978); Hilton v. Commissioner, 74 T.C. 305, aff'd, 671 F. 2d 316 (9th Cir. 1982), cert. denied, 459 U.S. 907 (1982); Coltec Industries v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied, 127 S. Ct. 1261 (Mem) (2007); BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007), aff'd, 523 F.3d 461 (4th Cir. 2008); Wells Fargo & Company v. United States, No. 06-628T, 2010 WL 94544, at *60 (Fed. Cl. Jan. 8, 2010) (distinguishing leasing case Consolidated Edison Company of New York, No. 06-305T, 2009 WL 3418533 (Fed. Cl. Oct. 21, 2009) by observing that "considerations of economic substance are factually specific to the transaction involved").
1041 As examples of cases in which courts have found that a transaction does not meet the requirements for the treatment claimed by the taxpayer under the Code, or does not have economic substance, See, e.g., BB&T Corporation v. United States, 2007-1 USTC P 50,130 (M.D.N.C. 2007) aff'd, 523 F.3d 461 (4th Cir. 2008); Tribune Company and Subsidiaries v. Commissioner, 125 T.C. 110 (2005); H.J. Heinz Company and Subsidiaries v. United States, 76 Fed. Cl. 570 (2007); Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied 127 S. Ct. 1261 (Mem.) (2007); Long Term Capital Holdings LP v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004), aff'd, 150 Fed. Appx. 40 (2d Cir. 2005); Klamath Strategic Investment Fund, LLC v. United States, 472 F. Supp. 2d 885 (E.D. Texas 2007); aff'd, 568 F. 3d 537 (5th Cir. 2009); Santa Monica Pictures LLC v. Commissioner, 89 T.C.M. 1157 (2005).
1042 See, e.g., Coltec Industries, Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006), cert. denied 127 S. Ct. 1261 (Mem.) (2007) ("the first asserted business purpose focuses on the wrong transaction--the creation of Garrison as a separate subsidiary to manage asbestos liabilities. . . . [W]e must focus on the transaction that gave the taxpayer a high basis in the stock and thus gave rise to the alleged benefit upon sale") 454 F.3d 1340, 1358 (Fed. Cir. 2006). See also ACM Partnership v. Commissioner, 157 F.3d at 256 n.48; Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 (1938) ("A given result at the end of a straight path is not made a different result because reached by following a devious path.").
1043 The provision defines "economic substance doctrine" as the common law doctrine under which tax benefits under subtitle A with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. Thus, the definition includes any doctrine that denies tax benefits for lack of economic substance, for lack of business purpose, or for lack of both.
1044 See, e.g., Treas. Reg. sec. 1.269-2(b) (stating that a distortion of tax liability indicating the principal purpose of tax evasion or avoidance might be evidenced by the fact that "the transaction was not undertaken for reasons germane to the conduct of the business of the taxpayer"). Similarly, in ACM Partnership v. Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated: Key to [the determination of whether a transaction has economic substance] is that the transaction must be rationally related to a useful nontax purpose that is plausible in light of the taxpayer's conduct and useful in light of the taxpayer's economic situation and intentions. Both the utility of the stated purpose and the rationality of the means chosen to effectuate it must be evaluated in accordance with commercial practices in the relevant industry. A rational relationship between purpose and means ordinarily will not be found unless there was a reasonable expectation that the nontax benefits would be at least commensurate with the transaction costs. [citations omitted]
1045 Claiming that a financial accounting benefit constitutes a substantial non-tax purpose fails to consider the origin of the accounting benefit (i.e., reduction of taxes) and significantly diminishes the purpose for having a substantial non-tax purpose requirement. See, e.g., American Electric Power, Inc. v. United States, 136 F. Supp. 2d 762, 791-92 (S.D. Ohio 2001) ("AEP's intended use of the cash flows generated by the [corporate-owned life insurance] plan is irrelevant to the subjective prong of the economic substance analysis. If a legitimate business purpose for the use of the tax savings 'were sufficient to breathe substance into a transaction whose only purpose was to reduce taxes, [then] every sham tax-shelter device might succeed,"') (citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287 (1999)); aff'd, 326 F3d 737 (6th Cir. 2003).
1046 See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at 94 (the economic substance inquiry requires an objective determination of whether a reasonable possibility of profit from the transaction existed apart from tax benefits); Compaq Computer Corp. v. Commissioner, 277 F.3d at 781 (applied the same test, citing Rice's Toyota World); IES Industries v. United States, 253 F.3d at 354 (the application of the objective economic substance test involves determining whether there was a "reasonable possibility of profit . . . apart from tax benefits.").
1047 There is no intention to restrict the ability of the courts to consider the appropriate treatment of foreign taxes in particular cases, as under present law.
1049 It is intended that the penalty would apply to a transaction the tax benefits of which are disallowed as a result of the application of the similar factors and analysis that is required under the provision for an economic substance analysis, even if a different term is used to describe the doctrine.
1050 As under present law, the penalties under section 6662 (including the new penalty) do not apply to any portion of an underpayment on which a fraud penalty is imposed.
1051 As revised by the provision, new section 6662A(e)(2)(b) provides that section 6662A will not apply to any portion of an understatement due to gross valuation misstatement under section 6662(h) or nondisclosed noneconomic substance transactions under new section 6662(i).
1053 Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561, par. (1); Act to extend the Generalized System of Preferences and the Andean Trade Preference Act, and for other purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
1054 All of the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
1055 H.R. 3962. The bill originated as the Affordable Health Care for America Act and passed the House on November 7, 2009. The Senate passed the bill with an amendment substituting the text of the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 by unanimous consent on June 18, 2010. The House agreed to the Senate amendment on June 24, 2010. The President signed the Act on June 25, 2010.
1059 Sec. 412. Similar rules apply to defined benefit pension plans under the Labor Code provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). A number of exceptions to the minimum funding rules apply. For example, governmental and church plans are not subject to the minimum funding rules. Under section 414(d), a governmental plan is generally a plan established and maintained for its employees by the Federal government, a State government or political subdivision, or an agency or instrumentality of the foregoing. A governmental plan also includes any plan to which the Railroad Retirement Act of 1935 or 1937 applies and which is financed by contributions required under that Act and any plan of an international organization that is exempt from taxation by reason of the International Organizations Immunities Act. A governmental plan includes a plan established and maintained by an Indian tribal government (as defined in section 7701(a)(40)), a subdivision of an Indian tribal government (determined in accordance with section 7871(d)), or an agency or instrumentality of either, so long as all participants are employees of such entity, substantially all of whose services as employees are in the performance of essential governmental functions but not in the performance of commercial activities (whether or not an essential government function). Under section 414(e), a church plan is a plan established and maintained for its employee by a church or by a convention or association of churches which is exempt from tax under section 501. A church plan may elect to be subject to the minimum funding rules.
1062 The PPA funding rules do not apply to eligible government contractor plans for plan years beginning before the earliest of: (1) the first plan year for which the plan ceases to be an eligible government contractor plan, (2) the effective date of the Cost Accounting Standards Pension Harmonization Rule, and (3) January 1, 2011. The new funding rules do not apply to eligible rural cooperative plans for plan years beginning before the earlier of: (1) the first plan year for which the plan ceases to be an eligible cooperative plan, or (2) January 1, 2017. The new funding rules do not apply to eligible PBGC settlement plans for plan years beginning before January 1, 2014.
1065 The PBGC was established for the purpose of ensuring that benefits promised under a defined benefit pension plan are paid (up to specified annual limits) if the sponsoring employer is not able to fulfill its obligation to adequately fund the plan and the plan is terminated when it is underfunded. ERISA sec. 4002(a). The benefit protection function of the PBGC is carried out through an insurance program that applies to defined benefit pension plans. Sponsors of plans that are subject to the insurance program are liable to the PBGC for premium payments. PBGC termination insurance serves as a backstop to the minimum funding rules.
1068 This clarification is effective for plan years beginning after December 31, 2008, and is elective for the preceding plan year. Final regulations issued under section 430 reserve the issue of the definition of "plan-related expenses". The definition of the term is expected to be the subject of future proposed regulations. Treas. Reg. sec. 1.430(d)-1(b)(2)(iii)(B).
1069 Under a special rule, a shortfall amortization base does not have to be established for a plan year if the value of a plan's assets is at least equal to the plan's funding target for the plan year. For purposes of the special rule, a transition rule applies for plan years beginning after 2007 and before 2011. The transition rule does not apply to a plan that (1) was not in effect for 2007, or (2) was subject to certain deficit reduction contribution rules for 2007 (i.e., a plan covering more than 100 participants and with a funded current liability below a specified threshold). Under the transition rule, a shortfall amortization base does not have to be established for a plan year during the transition period if the value of plan assets for the plan year is at least equal to the applicable percentage of the plan's funding target for the year. The applicable percentage is 92 percent for 2008, 94 percent for 2009, and 96 percent for 2010. While the PPA provided that the transition rule did not apply to a plan for any plan year after 2008 unless, for each preceding plan year after 2007, the plan's shortfall amortization base was zero (i.e., the plan was eligible for the special rule each preceding year), WRERA amended the PPA rules to extend the transition rule to plan years beginning after 2008 even if, for each preceding plan year after 2007, the plan's shortfall amortization base was not zero.
1070 Treas. Reg. sec. 1.430(h)(2)-1(h)(3). Final regulations under sections 430(d), 430(f), 430(g), 430(h)(2), 430(i), and 436 were issued on October 7, 2009 and published in the Federal Register on October 15, 2009. 74 Fed. Reg. 53004. The regulations are effective for plan years beginning on or after January 1, 2010, except for plans to which a delayed effective date applies. For plan years beginning before January 1, 2010, plans are permitted to rely on the final regulations or the proposed regulations (72 Fed. Reg. 74215) (December 31, 2007) for purposes of satisfying the requirements of sections 430 and 436.
1071 Internal Revenue Service, Employee Plans News, March 2009 Special Edition.
1072 The effective interest rate with respect to a plan for a plan year is the single rate of interest which, if used to determine the present value of the benefits taken into account in determining the plan's funding target for the year, would result in an amount equal to the plan's funding target (as determined using the first, second, and third segment rates). Sec. 430(h)(2)(A).
1073 Secs. 302 and 412 of ERISA. Multiemployer defined benefit pension plans are also subject to the minimum funding requirements, but the rules for multiemployer plans differ in various respects from the rules applicable to single-employer plans. Governmental plans and church plans are generally exempt from the minimum funding requirements.
1074 This is as defined in Code section 401(k)(7)(B) without regard to (iv) thereof and includes (1) organizations engaged primarily in providing electric service on a mutual or cooperative basis, or engaged primarily in providing electric service to the public in its service area and which is exempt from tax or which is a State or local government, other than a municipality; (2) certain civic leagues and business leagues exempt from tax 80 percent of the members of which are described in (1); (3) certain cooperative telephone companies; and (4) any organization that is a national association of organizations described above.
1075 PPA specifies the interest rates that must be used in determining a plan's target normal cost and funding target. Present value is determined using three interest rates ("segment" rates), each of which applies to benefit payments expected to be made from the plan during a certain period. The first segment rate applies to benefits reasonably determined to be payable during the five-year period beginning on the first day of the plan year; the second segment rate applies to benefits reasonably determined to be payable during the 15-year period following the initial five-year period; and the third segment rate applies to benefits reasonably determined to be payable the end of the 15-year period. Each segment rate is a single interest rate determined monthly by the Secretary of the Treasury on the basis of a corporate bond yield curve, taking into account only the portion of the yield curve based on corporate bonds maturing during the particular segment rate period.
1078 48 C.F.R. 9904.412 and 9904.413.
1079 Section 106(d) of PPA requires the Cost Accounting Standards Board to review and revise sections 412 and 413 of the Cost Accounting Standards (48 C.F.R. 9904.412 and 9904.413) to harmonize the minimum required contributions under ERISA of eligible government contractor plans and government reimbursable pension plan costs, not later than Jan. 1, 2010. Any final rule adopted by the Cost Accounting Standards Board will be considered the Cost Accounting Standards Pension Harmonization Rule.
1080 Under present law, certain changes in actuarial assumptions that decrease the liabilities of an underfunded single-employer plan must be approved by the IRS.
1081 The deficit reduction contribution rules apply to single-employer plans, other than single-employer plans with no more than 100 participants on any day in the preceding plan year. Single-employer plans with more than 100 but not more than 150 participants are generally subject to lower contribution requirements under these rules.
1082 Under an alternative test, a plan is not subject to the deficit reduction contribution rules for a plan year if (1) the plan's funded current liability percentage for the plan year is at least 80 percent, and (2) the plan's funded current liability percentage was at least 90 percent for each of the two immediately preceding plan years or each of the second and third immediately preceding plan years.
1083 In determining a plan's funded current liability percentage for a plan year, the value of the plan's assets is generally reduced by the amount of any credit balance under the plan's funding standard account. However, this reduction does not apply in determining the plan's funded current liability percentage for purposes of whether an additional charge is required under the deficit reduction contribution rules.
1084 The deficit reduction contribution may also include an additional amount as a result of the use of a new mortality table prescribed by the Secretary of the Treasury in determining current liability for plan years beginning after 2006.
1085 In making these computations, the value of the plan's assets is reduced by the amount of any credit balance under the plan's funding standard account.
1086 That is, multiple employer plans of certain cooperatives (as defined in section 104 of PPA), certain PBGC settlement plans (as defined in section 105 of PPA), and plans of certain government contractors (as defined in section 106 of PPA).
1087 PPA secs. 104(b), 105(b), and 106(b). The third segment rate is derived from a corporate bond yield curve prescribed by the Secretary of the Treasury which reflects the yields on investment grade corporate bonds with varying maturities.
1088 Generally, an organization is exempt under section 501(c)(3) if it is a corporation, community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in, any political campaign of any candidate for public office.
1089 Secs. 401(a)(29) and 436. Parallel rules apply under ERISA.
1091 For purposes of the prohibited payment rules, the benefits provided with respect to a participant and any beneficiary of the participant (including an alternate payee) are aggregated. If the participant's accrued benefit is allocated to an alternate payee and one or more other persons, the amount that may be distributed is allocated in the same manner unless the applicable qualified domestic relations order provides otherwise.
1092 Treas. Reg. sec. 1.436-1(a)(3)(ii).
1093 Treas. Reg. sec. 1.411(a)-7(c)(4)
1094 Treas. Reg. sec. 1.411(d)-3(g)(16)
1095 A technical correction may be needed to make clear that the plan's adjusted funding target attainment percentage that is substituted is the percentage for the plan year beginning on or after (rather than after) October 1, 2007.
1096 A technical correction may be needed to make clear that the plan's adjusted funding target attainment percentage that is substituted is the percentage for the plan year beginning on or after (rather than after) October 1, 2007.
1097 Any contribution that may be taken into account in satisfying the requirement to make additional contributions with respect to more than one type of benefit limitation is taken into account only once for purposes of this reduction.
1098 In the case of plan years beginning in 2008, the percentage for the preceding plan year may be determined using such methods of estimation as the Secretary of the Treasury may provide.
1099 Treas. Reg. sec. 1.430(f)-1(b)(3).
1100 See Treas. Reg. sec. 1.430(f)-1(f) for the rules governing elections relating to prefunding balances and funding standard carryover balances.
1101 The PPA modified the minimum funding rules for multiemployer defined benefit pension plans. These modifications are generally effective for plan years beginning after 2007.
1103 Sec. 431(b)(2). Prior to the effective date of PPA, the amortization period was 30 years for past service liability, past service liability due to plan amendments, and losses and gains resulting from a change in actuarial assumptions.
1104 In the case of a plan in existence on January 1, 1974, past service liability under the plan on the first day on which the plan was first subject to ERISA was amortized over 40 years. In the case of a plan which was not in existence on January 1, 1974, past service liability under the plan on the first day on which the plan was first subject to ERISA was amortized over 30 years. Past service liability due to plan amendments was amortized over 30 years.
1108 Treas. Reg. sec. 1.412(c)(2)-1(b). Rev. Proc. 2000-40, 2000-2 CB 357, generally indicates that only an averaging period that does not exceed five years will be approved by the IRS. The revenue procedure also indicates that for a funding valuation method to be approved, the asset value determined under the method must be adjusted to be no greater than 120 percent and no less than 80 percent of the fair market value.
1110 Parallel rules apply under ERISA.
1111 Sec. 4971. Special rules apply under section 4971 for multiemployer plans in endangered or critical status.
1112 H.R. 5623. The bill passed the House on the suspension calendar on June 29, 2010. The Senate passed the bill by unanimous consent on June 30, 2010. The President signed the bill on July 2, 2010.
1113 For purchases before January 1, 2009, the dollar limits are $7,500 ($3,750 for a married individual filing separately). $7,500 ($3,750 for a married individual filing separately).
1115 If the individual sells the home (or the home ceases to be used as the principal residence of the individual and the individual's spouse) in the same taxable year the home is purchased, no credit is allowed.
1116 If the individual sells the home (or the home ceases to be used as the principal residence of the individual and the individual's spouse) in connection with such orders in the same taxable year the home is purchased, the credit is allowable.
1117 These terms have the same meaning as under the provision for exclusion of gain on the sale of certain principal residences. Sec. 121.
1120 Sec. 6311(d) requires that the Secretary identify such methods by regulations, and in doing so, specify when such payments are considered received, and provide means to ensure that tax matters may be resolved without involvement of financial institutions. The Secretary is also authorized to enter into contracts to obtain services related to receiving payment if it is cost-beneficial to the government, but may not pay "any fee or other consideration under such contracts for the use of credit, debit or charge cards for the payment of taxes," such as the convenience fees charged for electronic tax payments. Sec. 6311(d)(2); Treas. Reg. sec. 301.6311-2(f).
1121 Treas. Reg. sec. 1.6311-2.
1122 Treas. Reg. sec. 301.6311-2(a)(1); Treas. Reg. sec. 31.3602-1(j).
1123 Treas. Reg. sec. 301.6311-2(a)(2) provides that guidance on electronic funds transfers other than credit or debit cards is provided in regulations under section 6302, which defines electronic funds transfers generally to include any transfer of funds other than by check, draft or similar paper instrument, if initiated through an electronic media to instruct a financial institution or intermediary to debit or credit an account.
1124 Treas. Reg. secs. 301.6311-1(b)(1) and 301.6311-2(b) provide that the underlying tax obligation is not considered satisfied until the check or money order is paid or the electronic payment has been authorized by the relevant financial institution and the payment actually received.
1125 Secs. 5061(e) and 5703(b).
1126 Treas. Reg. sec. 301.6311-2(b).
1127 Treas. Reg. sec. 301.6311-2(a)(2) and Treas. Reg. sec. 31.6302-1(h)(8).
1131 Sec. 6103(b)(2). Return information is:
1132 Sec. 6103(c)-(o). Such exceptions include disclosures by consent of the taxpayer, disclosures to State tax officials, disclosures to the taxpayer and persons having a material interest, disclosures to Committees of Congress, disclosures to the President, disclosures to Federal employees for tax administration purposes, disclosures to Federal employees for nontax criminal law enforcement purposes and to the Government Accountability Office, disclosures for statistical purposes, disclosures for miscellaneous tax administration purposes, disclosures for purposes other than tax administration, disclosures of taxpayer identity information, disclosures to tax administration contractors and disclosures with respect to wagering excise taxes.
1133 Sec. 7803(d)(3)(C). See Treasury Inspector General for Tax Administration, Significant Problems Still Exist With Internal Revenue Service Efforts to Identify Prisoner Tax Refund Fraud (Audit No. 2011-40-009) (December 29, 2010).
1134 H.R. 4173. The bill passed the House on December 11, 2009. The Senate passed the bill with an amendment on May 20, 2010. The conference report was filed on June 29, 2010 (H.R. Rep. No. 111-517) and was passed by the House on June 30, 2010, and the Senate on July 15, 2010. The President signed the bill on July 21, 2010.
1138 Sec. 1256(f)(2). Gain or loss from trading of section 1256 contracts is treated as gain or loss from the sale of a capital asset except to the extent the contract is held for purposes of hedging ordinary loss property. (Sec. 1256(f)(3)).
1141 H.R. 1586. The bill originated as a bill imposing additional tax on bonuses received from certain TARP recipients and passed the House on the suspension calendar on March 19, 2009. The bill passed the Senate with an amendment substituting text relating to the FAA on March 22, 2010. The House agreed to the Senate amendment with an amendment on March 25, 2010. On August 5, 2010, the Senate concurred in the House amendment to the Senate amendment with an amendment substituting the text relating to education, jobs, and Medicaid for the previous language. On August 10, 2010, the House agreed to the Senate amendment to the House amendment to the Senate amendment. The President signed the bill on August 10, 2010. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of the Revenue Provisions of the Senate Amendment to the House Amendment to the Senate Amendment to H.R. 1586, Scheduled for Consideration by the House of Representatives on August 10, 2010 (JCX-46-10), August 10, 2010.
1141 H.R. 1586. The bill originated as a bill imposing additional tax on bonuses received from certain TARP recipients and passed the House on the suspension calendar on March 19, 2009. The bill passed the Senate with an amendment substituting text relating to the FAA on March 22, 2010. The House agreed to the Senate amendment with an amendment on March 25, 2010. On August 5, 2010, the Senate concurred in the House amendment to the Senate amendment with an amendment substituting the text relating to education, jobs, and Medicaid for the previous language. On August 10, 2010, the House agreed to the Senate amendment to the House amendment to the Senate amendment. The President signed the bill on August 10, 2010. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of the Revenue Provisions of the Senate Amendment to the House Amendment to the Senate Amendment to H.R. 1586, Scheduled for Consideration by the House of Representatives on August 10, 2010 (JCX-46-10), August 10, 2010.
1142 Secs. 901, 902, 960. Similar rules apply under sections 1291(g) and 1293(f) with respect to income that is includible under the passive foreign investment company ("PFIC") rules.
1147 Secs. 960(a), 1291(g), 1293(f).
1149 Sec. 902(c)(6)(B). Earnings and profits computations for these purposes are to be made under U.S. concepts. Secs. 902(c)(1), 964(a).
1154 Sec. 904(d). Separate foreign tax credit limitations also apply to certain categories of income described in other sections. See, e.g., secs. 901(j), 904(h)(10), 865(h).
1155 Sec. 904(d)(2)(B). Passive income is defined by reference to the definition of foreign personal holding company income in section 954(c), and thus generally includes dividends, interest, rents, royalties, annuities, net gains from certain property or commodities transactions, foreign currency gains, income equivalent to interest, income from notional principal contracts, and income from certain personal service contracts. Exceptions apply for certain rents and royalties derived in an active business and for certain income earned by dealers in securities or other financial instruments. Passive category income also includes amounts that are includible in gross income under section 1293 (relating to PFICs) and dividends received from certain DISCs and FSCs.
1160 It is not intended that there be a foreign tax credit splitting event when, for example, a CFC pays or accrues a foreign income tax and takes into account the related income in the same year, even though the earnings and profits to which the foreign income tax relates may be distributed to a covered person as a dividend or included in such covered person's income under subpart F.
1161 Secs. 901, 902, 960. Similar rules apply under sections 1291(g) and 1293(f) with respect to income that is includible under the passive foreign investment company ("PFIC") rules.
1168 Sec. 902(c)(6)(B). Earnings and profits computations for these purposes are to be made under U.S. concepts. Secs. 902(c)(1), 964(a).
1173 Sec. 904(d). Separate foreign tax credit limitations also apply to certain categories of income described in other sections. See, e.g., secs. 901(j), 904(h)(10), 865(h).
1174 Sec. 904(d)(2)(B). Passive income is defined by reference to the definition of foreign personal holding company income in section 954(c), and thus generally includes dividends, interest, rents, royalties, annuities, net gains from certain property or commodities transactions, foreign currency gains, income equivalent to interest, income from notional principal contracts, and income from certain personal service contracts. Exceptions apply for certain rents and royalties derived in an active business and for certain income earned by dealers in securities or other financial instruments. Passive category income also includes amounts that are includible in gross income under section 1293 (relating to PFICs) and dividends received from certain DISCs and FSCs.
1179 Treas. Reg. sec. 301.7701-1, et seq.
1183 Sec. 338(d)(3). Under section 1504(a)(2), the ownership of stock of any corporation meets the requirements of an affiliated group if it (A) possesses at least 80 percent of the total voting power of the stock of such corporation, and (B) has a value equal to at least 80 percent of the total value of the stock of such corporation. Further, section 1504(a)(4) states that for purposes of meeting the 80-percent requirement, the term stock does not include any stock which (A) is not entitled to vote, (B) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, (C) has redemption and liquidation rights which do not exceed the issue price of such stock, and (D) is not convertible into another class of stock.
1184 A foreign corporation cannot be the target corporation in the case of a section 338(h)(10) election. See Treas. Reg. sec. 1.338(h)(10)-1(b)(1), (2), (3).
1185 Sec. 338(h)(10); Treas. Regs. sec. 1.338(h)(10)-1(d)(3).
1186 Section 338(h)(16) addresses the impact of the deemed asset sale on the E&P of the foreign target corporation for purposes of determining the source and character of any amount includible in gross income as a dividend under section 1248 to the seller.
1187 When a domestic corporation or a CFC is the purchaser with respect to which a section 338(g) election is made for a foreign target corporation, the deemed asset sale may have U.S. tax consequences. For example, if the foreign target becomes a CFC for an uninterrupted period of 30 days or more during a taxable year pursuant to Section 951(a) prior to the purchasing corporation completing the qualified stock purchase, the deemed asset sale may generate subpart F income for any U.S. shareholder of the foreign target corporation. Treas. Reg. sec. 1.338-9(b).
1190 Sec. 743(a). But see section 743(d) requiring a reduction to the basis of partnership property in certain cases where there is a substantial built-in loss.
1192 This includes transaction under section 338(g) and section 338(h)(10).
1193 For example, the deemed liquidation of a CFC as the result of the making of an entity classification election pursuant to Treas. Reg. sec. 301.7701-3 may result in a section 331 liquidation for U.S. tax purposes that is disregarded for foreign income tax purposes.
1194 Section 336(e) provides that, to the extent provided by the Secretary, in cases in which (1) a corporation owns at least 80 percent of the vote and value of stock of another corporation (as defined in section 1504(a)(2)), and (2) such corporation sells, exchanges, or distributes all of stock of such corporation, an election may be made to treat this sale, exchange, or distribution as a disposition of all of the assets of the other corporation, and no gain or loss is recognized on the sale, exchange, or distribution of the stock. To date, the Secretary has not promulgated regulations under section 336(e) so no election may be made. Nonetheless, to the extent regulations are promulgated under section 336(e) in the future permitting such an election to be made, a transaction to which the section 336(e) election relates would be a covered asset acquisition.
1196 A private letter ruling may be relied upon only by the taxpayer requesting the ruling. Transition relief is available only with respect to the transaction for which the ruling is requested.
1198 Secs. 901, 902, 960. Similar rules apply under sections 1291(g) and 1293(f) with respect to income that is includible under the passive foreign investment company ("PFIC") rules.
1203 Sec. 904(d). Separate foreign tax credit limitations also apply to certain categories of income described in other sections. See, e.g., secs. 901(j), 904(h)(10), 865(h).
1204 Sec. 904(d)(2)(B). Passive income is defined by reference to the definition of foreign personal holding company income in section 954(c), and thus generally includes dividends, interest, rents, royalties, annuities, net gains from certain property or commodities transactions, foreign currency gains, income equivalent to interest, income from notional principal contracts, and income from certain personal service contracts. Exceptions apply for certain rents and royalties derived in an active business and for certain income earned by dealers in securities or other financial instruments. Passive category income also includes amounts that are includible in gross income under section 1293 (relating to PFICs) and dividends received from certain DISCs and FSCs.
1209 Sec. 904(h). The special sourcing rule applies in the case of subpart F and passive foreign investment company inclusions to the extent that such amount is attributable to income of the U.S.-owned foreign corporation from U.S. sources; in the case of dividends, to the portion of the U.S.-owned foreign corporation's earnings and profits for the taxable year that are from U.S. sources; and in the case of interest paid to a U.S. shareholder or related person, to amounts properly allocable to the U.S.-owned foreign corporation's U.S.-source income. De minimis exceptions apply if the U.S.-owned foreign corporation has a small amount of U.S.-source income.
1220 A U.S. Shareholder includes individuals and entities. Sec. 951(b). In contrast, only those U.S. Shareholders that are corporations are entitled to the deemed-paid credit.
1221 Secs. 901, 902, 960. Similar rules apply under sections 1291(g) and 1293(f) with respect to income that is includible under the passive foreign investment company ("PFIC") rules.
1227 Sec. 960(a)(1); Treas. Reg. sec. 1.960-1(i)(1).
1228 See secs. 902(c)(1), 964; Treas. Reg. sec. 1.964-1(a)(1).
1229 For an exception, see sec. 312(k)(4).
1231 Sec. 902(c)(6)(B). E&P computations for these purposes are to be made under U.S. tax principles. Secs. 902(c)(1), 964(a).
1236 Sec. 904(d). Separate foreign tax credit limitations also apply to certain categories of income described in other sections. See, e.g., secs. 901(j), 904(h)(10), 865(h).
1237 Sec. 904(d)(2)(B). Passive income is defined by reference to the definition of foreign personal holding company income in section 954(c), and thus generally includes dividends, interest, rents, royalties, annuities, net gains from certain property or commodities transactions, foreign currency gains, income equivalent to interest, income from notional principal contracts, and income from certain personal service contracts. Exceptions apply for certain rents and royalties derived in an active business and for certain income earned by dealers in securities or other financial instruments. Passive category income also includes amounts that are includible in gross income under section 1293 (relating to PFICs) and dividends received from certain DISCs and FSCs.
1245 Similarly, if this hypothetical distribution would be subject to a withholding tax upon distribution to USP, if it had been actually made, any such tax would not be taken into account in determining the hypothetical credit. However, this conclusion results because such taxes are described in section 901(b), thus they are outside the scope of the provision.
1246 See, e.g., secs. 902(b), (c), and 904(d)(3)(B), (D).
1247 For purposes of this example, assume that each CFC has: (1) a "u" functional currency; (2) E&P comprising solely post-1986 undistributed earnings or deficits in post-1986 undistributed earnings, such that there are no pre-1987 accumulated profits; (3) only post-1986 foreign income taxes; (4) no previously-taxed income; (5) only E&P and foreign income taxes in the section 904(d) general category; and (6) no other attributes than those listed. Except as provided in the example, there are no other distributions or inclusions during the taxable year. In addition, Country B imposes a 10-percent withholding tax on dividend payments to foreign shareholders.
1248 Sec. 954(c)(6). This assumes that the subpart F look-through rules of section 954(c)(6) are extended, and are therefore applicable to the hypothetical distribution. In the event the look-through rule of section 954(c)(6) expires, the 100u hypothetical distribution would result in a dividend of 100u that would be currently included in USP's income as a subpart F item at the level of CFC1.
1249 The hypothetical amount of foreign taxes deemed paid equals (100u/300u) X $60. The post-1986 undistributed earnings that is the denominator of the section 902(a) fraction for purposes of the provision equals CFC1's post-1986 undistributed earnings of 200u (determined without regard to the provision) plus the amount of the hypothetical dividend from CFC2, 100u. $10
1250 If, in the same taxable year, CFC1 were also to make an actual distribution of all its accumulated E&P of 200u, the 100u hypothetical distribution from CFC1 to USP would have no impact on the calculation of USP's actual deemed paid credit from CFC1's actual dividend. The deemed-paid credit on the 200u dividend would be $10, which equals (200u/200u X $10). In addition, the calculation of the hypothetical credit with respect to the hypothetical distribution of 100u from CFC2 would be the same (100u/300u X $60 = $20) whether or not CFC1 paid an actual dividend.
1252 The excess taxes equal the deemed paid foreign tax credit (determined without regard to the provision) of $50 minus the hypothetical credit of $20. Alternatively, if CFC2's E&P also included 125u in previously taxed income (which is taken into account in determining that the section 956 inclusion is 100u), then the excess taxes remaining at CFC2 would be $50, because the applicable ordering rules would prioritize the hypothetical distribution as coming first from the 125u in previously taxed income over the 100u in untaxed earnings. See sec. 959(c).
1253 See Treas. Reg. sec. 1.1001-3.
1256 See H.R. Rep. No. 98-861 (1984) (Conf. Rep.), 1222-1224; Rev. Rul. 80-189, 1980-2 C.B. 106.
1258 As that term is defined by section 951(b).
1260 For purposes of this rule, "CFC" is defined by reference to section 957, but without regard to section 953(c).
1261 It is not intended that the provision apply if an amount is not subject to tax under this chapter for the taxable year in which the dividend arises solely as a result of the application of section 959.
1262 Sec. 1442; Rev. Rul. 92-85; 1992-2 C.B. 69.
1264 See, e.g., secs. 861(b), 862(b), and 863(a), which require that a taxpayer properly allocate and apportion expenses, losses, or other deductions, without containing any specific rules for allocating and apportioning particular types of deductions.
1265 Sec. 864(e). In the case of interest expense, the rules generally are based on the premise that money is fungible and that interest expense is properly attributable to all business activities and property of a taxpayer, regardless of any specific purpose for incurring an obligation on which interest is paid. Temp. Treas. Reg. sec. 1.861-9T(a).
1266 Secs. 864(e)(1), 864(e)(2).
1267 Secs. 864(e)(5)(A), sec. 1504. The affiliated group for interest allocation purposes generally excludes certain corporations that are financial institutions. These corporate financial institutions are not treated as members of the regular affiliated group for purposes of applying the one-taxpayer rule to other non-financial members of that group. Instead, all such corporate financial institutions that would be so affiliated are treated as a separate single corporation for interest allocation purposes. Sec. 864(e)(5)(B).
1269 Temp. Treas. Reg. sec. 1.861-11T(d)(6)(ii). The question as to whether a foreign person is engaged in a U.S. trade or business has generated a significant body of case law. Basic issues involved in the determination include whether the activity constitutes business rather than investing, whether sufficient activities in connection with the business are conducted in the United States, and whether the relationship between the foreign person and persons performing functions in the United States with respect to the business is sufficient to attribute those functions to the foreign person. Generally, only U.S.-source income is treated as effectively connected with the conduct of a U.S. trade or business. However, certain limited categories of foreign-source income are treated as effectively connected if the income is attributable to an office or other fixed place of business maintained by the foreign person in the United States. Sec. 864(c).
1270 Temp. Treas. Reg. sec. 1.861-11T(d)(6)(ii).
1271 Secs. 861(a)(1), (2), 862(a)(1), (2).
1272 Secs. 871(a)(1)(A), 881(a)(1), 1441(b), and 1442(a).
1276 Sec. 861(c)(1). The income of a subsidiary is attributed to the tested company only to the extent that the tested company actually receives income from the subsidiary in the form of dividends. Conference Report to the 1986 Tax Reform Act, Pub. L. No. 99-514, Vol. II, 602; see also Rev. Rul. 73-63, 1973-1 C.B. 336; P.L.R. 6905161160A (May 16, 1969).
1277 Hence, this percentage is determined without application of the new aggregation rule.
1278 A person will be treated as a related person with respect to a controlled foreigh corporation if (A) such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or (B) such person is a corporation, partnership, trust or estate which is controlled by the same person or persons which control the resident controlled foreign corporation. For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply. Sec. 954(d)(3).
1279 Sec. 6501(a). Returns that are filed before the date they are due are deemed filed on the due date. See sec. 6501(b)(1) and (2).
1283 For example, service of an administrative summons triggers the suspension either (1) beginning six months after service (in the case of John Doe summonses) or (2) when a proceeding to quash a summons is initiated by a taxpayer named in a summons to a third-party record-keeper. Judicial proceedings initiated by the government to enforce a summons generally do not suspend the limitation period.
1284 Sec. 513, Pub. L. No. 111-147.
1285 Required information reporting subject to this three-year rule is reporting under sections 6038 (certain foreign corporations and partnerships), 6038A (certain foreign-owned corporations), 6038B (certain transfers to foreign persons), 6038D (individuals with foreign financial assets), 6046 (organizations, reorganizations, and acquisitions of stock of foreign corporations), 6046A (interests in foreign partnerships), and 6048 (certain foreign trusts), as well as information required with respect to elections under sections 1295(b) passive foreign investment corporations.
1287 Earned income is defined as (1) wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income, plus (2) the amount of the individual's net self-employment earnings.
1288 H.R. 5552. The bill passed the House on the suspension calendar on June 29, 2010. The Senate passed the bill by unanimous consent on August 5, 2010. The President signed the bill on August 16, 2010.
1292 For example, aiding and abetting (18 U.S.C. sec 2); conspiracy to defraud the United States (18 U.S.C. sec. 286); false, fictitious or fraudulent claims (18 U.S.C. sec. 287); or conspiracy to commit an offense or to defraud the United States (18 U.S.C. sec. 371).
1293 Internal Revenue Manual ("IRM") par. 9.5.12.4.1, July 25, 2007. Note that IRS investigators also support the development of financial crime investigations by Department of Justice related to organized crime, drug enforcement and counterterrorism programs.
1294 18 U.S.C. sec. 3556, which authorizes restitution orders both for cases in which restitution is mandatory as described in section 3663A and for those cases in which restitution is at the discretion of the court as described in section 3663. In either case, any order must comply with the procedures of section 3664.
1295 18 U.S.C. sec. 3663A(c)(A)(ii) requires restitution for all crimes against property arising under Title 18. Tax-related charges may arise under 18 U.S.C. secs. 286, 287, 371 and 1001.
1296 18 U.S.C. sec. 3663(a)(3).
1297 18 U.S.C. Appendix, Chapter 5E1.1, United States Sentencing Guidelines.
1298 United States v. Leahy, 464 F.3d 773 (7th Cir. 2006); United States v. Ekanem, 383 F.3d 40 (2d Cir. 2004).
1299 Dept. of Justice Criminal Tax Manual, par. 44.03 explains that in determining the principle amount to be paid as restitution, the court may include an amount representing pre-judgment interest to compensate for the failure to pay the tax when due under the Code, citing United States v. Gordon, 393 F. 3d 1044, 1057 (9th Cir. 2004); United States v. Helmsley, 941 F.2d 71 (2d Cir. 1991).
1300 18 U.S.C. secs. 3613(c) and 3613(d).
1302 Morse v. United States, 419 F.3d 829 (8th Cir. 2005), held that the criminal prosecution did not require proof of a specific tax liability as an element of the crime, and therefore the government was not estopped from pursuing civil proceedings to collect an amount greater than any tax loss identified as part of the criminal sentence.
1303 IRS Policy Statement 4-26 (formerly P-4-84), in IRM par. 5.1.5.2, explains the extent to which civil and criminal investigations may proceed in parallel. Once the IRS has referred a case and asked the Department of Justice to prosecute, authority to resolve the liabilities for the years that are the subject of the referral rests exclusively with the Department of Justice. Sec. 7122(a).
1304 United States v. Helmsley, 941 F.2d 71 (2d Cir. 1991).
1306 Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(a); Health Care and Education Reconciliation Act of 2010, Pub L. No. 111-152, sec. 1410; Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec.561(1); Act to extend the Generalized System of Preferences and the Andean Trade Preference Act, and for other purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
1307 United States Manufacturing Enhancement Act of 2010, Pub. L. No. 111-227, sec. 4002; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-210; sec. 3; Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(b); Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561(2).
1308 Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561(3).
1309 All the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
1310 H.R. 5297. The House Committee on Ways and Means reported H.R. 4849 on March 19, 2010 (H.R. Rep. 111-447). The House passed H.R. 4849 on March 24, 2010. The House passed H.R. 5297 on June 17, 2010. The Senate passed H.R. 5297 with an amendment on September 16, 2010. On September 23, 2010, the House agreed to the Senate amendment. The President signed the bill on September 27, 2010. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of the Tax Provisions in Senate Amendment 4594 to H.R. 5297, the "Small Business Jobs Act of 2010," Scheduled for Consideration by the United States Senate on September 16, 2010 (JCX-47-10), September 16, 2010.
1313 Sec. 57(a)(7). In the case of qualified small business stock, the percentage of gain excluded from gross income which is an alternative minimum tax preference is (i) seven percent in the case of stock disposed of in a taxable year beginning before 2011; (ii) 42 percent in the case of stock acquired before January 1, 2001, and disposed of in a taxable year beginning after 2010; and (iii) 28 percent in the case of stock acquired after December 31, 2000, and disposed of in a taxable year beginning after 2010.
1314 The 50 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
1315 The amount of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. The amount so included is the sum of (i) 50 percent (the percentage included in taxable income) of the total gain and (ii) the applicable preference percentage of the one-half gain that is excluded from taxable income.
1316 The 25 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
1317 The 46 percent of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. Forty-six percent is the sum of 25 percent (the percentage of total gain included in taxable income) plus 21 percent (the percentage of total gain which is an alternative minimum tax preference).
1318 The provision was subsequently amended by section 760 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen.
1319 Sec. 38(c). The general business credit is the sum of the credits allowed under sec. 38(b).
1321 For example, a calendar year corporation meets the $50 million gross receipts test for the 2010 taxable year, if as of January 1, 2010, its average annual gross receipts for the 3-taxable-year period ending December 31, 2009, does not exceed $50 million. The aggregation and special rules under sections 448(c)(2) and (3) apply in applying the test.
1322 See section 38(c)(4)(B) for a list of the specified credits.
1323 For example, a calendar year corporation meets the $50 million gross receipts test for the 2010 taxable year, if as of January 1, 2010, if its average annual gross receipts for the 3-taxable-year period ending December 31, 2009, does not exceed $50 million. The aggregation and special rules under sections 448(c)(2) and (3) apply for purposes of the test.
1325 Sec. 1374(d)(7)(A). The 10-year period refers to ten calendar years from the first day of the first taxable year for which the corporation was an S corporation.
1327 Sec. 1374(d)(8). With respect to such assets, the recognition period runs from the day on which such assets were acquired (in lieu of the beginning of the first taxable year for which the corporation was an S corporation). Sec. 1374(d)(8)(B).
1328 Shareholders continue to take into account all items of gain and loss under section 1366.
1330 The five-year period refers to five calendar years from the first day of the first taxable year for which the corporation was an S corporation.
1331 Additional section 179 incentives are provided with respect to qualified property meeting applicable requirements that is used by a business in an enterprise zone (sec. 1397A), a renewal community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
1332 The temporary $250,000 and $800,000 amounts were enacted in the Economic Stimulus Act of 2008, Pub. L. No. 110-185, extended for taxable years beginning in 2009 by the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, and extended for taxable years beginning in 2010 by the Hiring Incentives to Restore Employment Act of 2010, Pub. L. No. 111-147.
1334 The provision was modified and extended for taxable years beginning in 2012 by section 402 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen.
1335 For purposes of the provision, qualified leasehold improvement property has the meaning given such term under section 168(e)(6), qualified restaurant property has the meaning given such term under section 168(e)(7) (and includes a building described in section 168(e)(7)(A)(i) that is placed in service after December 31, 2009 and before January 1, 2012), and qualified retail improvement property has the meaning given such term under section 168(e)(8) (without regard to section 168(e)(8)(E)).
1336 For example, assume that during 2010, a company's only asset purchases are section 179-eligible equipment costing $100,000 and qualifying leasehold improvements costing $350,000. Assuming the company has no other asset purchases during 2010, and is not subject to the taxable income limitation, the maximum section 179 deduction the company can claim for 2010 is $350,000 ($100,000 with respect to the equipment and $250,000 with respect to the qualifying leasehold improvements).
1337 For example, assume that during 2010, a company's only asset purchases are section 179-eligible equipment costing $100,000 and qualifying leasehold improvements costing $200,000. Assume the company has no other asset purchases during 2010, and has a taxable income limitation of $150,000. The maximum section 179 deduction the company can claim for 2010 is $150,000, which is allocated pro rata between the properties, such that the carryover to 2011 is allocated $100,000 to the qualified leasehold improvements and $50,000 to the equipment.
1338 Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules regarding whether an item must be capitalized under section 263 or section 263A.
1339 Assume that the cost of the property is not eligible for expensing under section 179.
1340 The additional first-year depreciation deduction is not available for any property that is required to be depreciated under the alternative depreciation system of MACRS. The additional first-year depreciation deduction is also not available for qualified New York Liberty Zone leasehold improvement property as defined in section 1400L(c)(2).
1341 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer.
If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).
1342 A special rule applies in the case of certain leased property. In the case of any property that is originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the taxpayer within three months after the date that the property was placed in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback.
If property is originally placed in service by a lessor, such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale.
1343 Property qualifying for the extended placed in service date must have an estimated production period exceeding one year and a cost exceeding $1 million.
1344 Property does not fail to qualify for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect prior to January 1, 2008.
1345 For purposes of determining the amount of eligible progress expenditures, it is intended that rules similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply.
1346 The provision was temporarily expanded and extended for two years generally through 2012 (through 2013 for certain longer-lived and transportation property) by section 401 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, described in Part Sixteen of this document.
1348 Treas. Reg. sec. 1.460-5.
1349 For certain property, including tangible property used predominantly outside of the United States, tax-exempt use property, tax-exempt bond-financed property, and certain other property, the MACRS "alternative depreciation system" of section 168(g) applies, generally increasing recovery periods and requiring straight-line depreciation.
1350 Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules regarding whether an item must be capitalized under section 263 or section 263A.
1351 The additional first-year depreciation deduction is not available for any property that is required to be depreciated under the alternative depreciation system of MACRS. The additional first-year depreciation deduction is also not available for qualified New York Liberty Zone leasehold improvement property as defined in section 1400L(c)(2).
1352 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer.
If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).
1353 A special rule applies in the case of certain leased property. In the case of any property that is originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the taxpayer within three months after the date that the property was placed in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback.
If property is originally placed in service by a lessor (including by operation of section 168(k)(2)(D)(i)), such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale. $1 million.
1354 Property qualifying for the extended placed in service date must have an estimated production period exceeding one year and a cost exceeding $1 million.
1355 Property does not fail to qualify for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect prior to January 1, 2008.
1356 For purposes of determining the amount of eligible progress expenditures, it is intended that rules similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply.
1357 For example, assume a calendar year taxpayer is required to use the percentage-of-completion method to account for a long-term contract during 2010. Assume further that during 2010 the taxpayer purchases and places into service equipment with a cost basis of $500,000 and MACRS recovery period of 5 years. The taxpayer uses the equipment exclusively in performing its obligation under the contract. In computing the percentage of completion under section 460(b)(1)(A), the depreciation on the equipment (assuming a half-year convention) taken into account as a cost allocated to the contract for 2010 is $100,000 [$500,000/5*200%*.5]. The amount of the depreciation deduction that may be claimed by the taxpayer in 2010 with respect to the equipment is $300,000 [($500,000 * 50%) + (($500,000-(500,000*50%))/5*200%*.5)].
1358 Sec. 168(k)(2)(B) generally applies to property having longer production periods.
1363 Temp. Treas. Reg. sec. 1.195-1T(b).
1366 Treas. Reg. sec. 1.6011-4.
1368 Treas. Reg. sec. 1.6011-4(b)(2)-(6).
1369 The regulations clarify that the term "substantially similar" includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Further, the term must be broadly construed in favor of disclosure. Treas. Reg. sec. 1.6011-4(c)(4).
1371 Treas. Reg. sec. 1.6011-4(b)(6).
1372 Treas. Reg. sec. 1.6011-4(b)(3).
1373 Treas. Reg. sec. 1.6011-4(b)(4).
1374 Treas. Reg. sec. 1.6011-4(b)(5).
1375 Prop. Treas. Reg. sec. 1.6011-4(b)(7), published September 26, 2007 (REG-129916-07).
1376 See, e.g., Treas. Reg. sec. 1.6011-4(c)(3)(ii), Example 2.
1378 Sec. 6707A(e)(2)(C); Rev. Proc. 2005-51, 2005-2 CB 296.
1379 In determining whether to rescind (or abate) the penalty for failing to disclose a reportable transaction on the grounds that doing so would promote compliance with the tax laws and effective tax administration, it is intended that the Commissioner take into account whether: (1) the person on whom the penalty is imposed has a history of complying with the tax laws; (2) the violation is due to an unintentional mistake of fact; and (3) imposing the penalty would be against equity and good conscience.
1380 This does not limit the ability of a taxpayer to challenge whether a penalty is appropriate (e.g., a taxpayer may litigate the issue of whether a transaction is a reportable transaction (and thus subject to the penalty if not disclosed) or not a reportable transaction (and thus not subject to the penalty)).
1384 See, "Reasons for Change" in discussion of section 811 of the American Jobs Creation Act of 2004 ("AJCA"), Pub. L. No. 108-357, p. 361 of the Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress (JCS-5-05), May 2005.
1385 See, discussion of "Legislative Recommendations with Legislative Action: Modify Internal Revenue Code Section 6707A to Ameliorate Unconscionable Impact," Vol. 1 National Taxpayer Advocate 2008 Annual Report to Congress, p. 419.
1386 Sec. 162(l)(1). See Notice 2010-38 for a discussion of the deduction for children who have not attained age 27 as of the end of the taxable year.
1388 Sec. 1401. However, under section 9015 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, for remuneration and self-employment income received for taxable years beginning after December 31, 2012, the HI tax under SECA is increased by an additional tax of 0.9 percent on self-employment income received in excess of a threshold amount. However, unlike the general 1.45 percent HI tax on self-employment income, this additional tax is on the combined wages and self-employment income of the self-employed individual and spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
1389 For purposes of computing net earnings from self-employment, taxpayers are permitted a deduction equal to the product of the taxpayer's earnings (determined without regard to this deduction) and one-half of the sum of the rates for OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 percent of net earnings. This deduction reflects the fact that the FICA rates apply to an employee's wages, which do not include FICA taxes paid by the employer, whereas the self-employed individual's net earnings are economically equivalent to an employee's wages plus the employer share of FICA taxes.
1391 A technical correction may be necessary so that the statute reflects this intent.
1392 Sec. 212 allows deductions for ordinary and necessary expenses paid or incurred for the production or collection of income.
1393 Cellular telephones (or other similar telecommunications equipment) were added as listed property as in section 7643 of the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239.
1396 Temp. Treas. Reg. sec. 1.274-5T(b)(6).
1397 Temp. Treas. Reg. sec. 1.274-5T(c)(2)(ii)(C).
1398 Temp. Treas. Reg. sec. 1.274-5T(e)(2)(i)(A).
1399 Ibid.1400 Temp. Treas. Reg. sec. 1.274-5T(e)(2)(ii). In Notice 2009-46, 2009-23 I.R.B. 1068, the Service requested comments regarding several proposals to simplify the procedures for employers to substantiate an employee's business use of certain employer-provided telecommunications equipment (including cellular telephones).
1401 Sec. 280F(b)(1). If for any taxable year after the year in which the property is placed in service the use of the property for trade or business purposes decreases to 50 percent or less of the total use of the property, then the amount of depreciation allowed in prior years in excess of the amount of depreciation that would have been allowed for such prior years under the alternative depreciation system is recaptured (i.e., included in gross income) for such taxable year.
1404 The provision does not affect Treasury's authority to determine the appropriate characterization of cell phones as a working condition fringe benefit under section 132(d) or that the personal use of such devices that are provided primarily for business purposes may constitute a de minimis fringe benefit, the value of which is so small as to make accounting for it administratively impracticable, under section 132(e).
1406 Sec. 6041(a). The information return is generally submitted electronically as a Form 1096 and Form 1099, although certain payments to beneficiaries or employees may require use of Forms W-3 and W-2, respectively. Treas. Reg. sec. 1.6041-1(a)(2).
1407 Sec. 6041(a) requires reporting "other than payments to which section 6042(a)(1), 6044(a)(1), 6047(c), 6049(a) or 6050N(a) applies and other than payments with respect to which a statement is required under authority of section 6042(a), 6044(a)(2) or 6045[.]" The payments thus excepted include most interest, royalties, and dividends.
1408 Treas. Reg. sec. 1.6041-3(p).
1409 Pub. L. No. 111-148, sec. 9006 (effective for payments made after December 31, 2011).
1410 Sec. 6041(d). Specifically, the recipient of the payment is required to provide a Form W-9 to the payor, which enables the payee to provide the recipient of the payment with an annual statement showing the aggregate payments made and contact information for the payor. If a Form W-9 is not provided, the payor is required to "backup withhold" tax at a rate of 28 percent of the gross amount of the payment unless the payee has otherwise established that the income is exempt from backup withholding. The backup withholding tax may be credited by the payee against regular income tax liability, i.e., it is effectively an advance payment of tax, similar to the withholding of tax from wages. This combination of reporting and backup withholding is designed to ensure that U.S. persons pay an appropriate amount of tax with respect to investment income, either by providing the IRS with the information that it needs to audit payment of the tax or, in the absence of such information, requiring collection of the tax on payment.
1411 Treas. Reg. sec. 1.6041-3(p).
1412 Sec. 6050H. This information is provided on Form 1098.
1415 Sec. 6723. The penalty for failure to timely comply with a specified information reporting requirement is $50 per failure, not to exceed $100,000 for a calendar year.
1416 See http://www.irs.gov/pub/irs-news/tax_gap_figures.pdf.
1417 Section 6722(c)(1) provides that the penalty per failure is the greater of $100 or a fixed percentage of the aggregate items to be shown on the payee statements. The fixed amount is 10 percent for statements other than those required under sections 6045(b), 6041A(e), 6050H(d), 6050J(e), 6050K(b), or 6050L(c). The penalty is the greater of $100 or five percent of the amount required to be shown on statements required under sections 6045(b), 6050K(b) or 6050L(c).
1418 The penalty was originally $50 for each failure, up to a maximum of $100,000 per year, as enacted by section 150 of the Tax Reform Act of 1986, Pub. L. No. 99-514. In 1989, the present penalty amounts in three tiers were enacted. Section 7711 of the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239.
1419 Secs. 6011, 6111 and 6112.
1420 Treas. Reg. sec. 1.6011-4.
1423 Sec. 6707A(c)(1) states that the term means "any transaction with respect to which information is required to be included with a return or statement because, as determined under regulations prescribed under section 6011, such transaction is of a type which the Secretary determines as having a potential for tax avoidance or evasion." Sections 6111(b)(2) and 6112 both define "reportable transaction" by reference to the definition in section 6707A(c). The definition of "listed transaction" similarly depends upon identification of transactions by the Secretary as tax avoidance transactions for purposes of section 6011.
1424 Treas. Reg. sec. 1.6011-4(b)(2)-(6).
1425 Section 6707A imposes a penalty for failure to comply with the reporting requirements of section 6011. A single reportable transaction may have to be reported by multiple taxpayers in connection with multiple tax returns. For example, a reportable transaction entered into by a partnership may have to be reported under section 6011 by both the partnership and its partners. The amount of the penalty due for each taxpayer's failure to comply varies depending upon whether or not the transaction is a listed transaction and whether the relevant taxpayer is an individual. For listed transactions, the maximum penalty is $100,000 for natural persons and $200,000 for all other persons. For reportable transactions other than listed transactions, the maximum penalty is $10,000 for natural persons and $50,000 for all other persons. A public entity that is required to pay a penalty for an undisclosed listed or reportable transaction must disclose the imposition of the penalty in reports to the SEC for such periods specified by the Secretary. Failure to comply with this reporting requirement may result in assessment of a second tier penalty.
1426 Sec. 6707A(d). In determining whether to rescind (or abate) the penalty for failing to disclose a reportable transaction on the grounds that doing so would promote compliance with the tax laws and effective tax administration, it is intended that the Commissioner take into account whether: (1) the person on whom the penalty is imposed has a history of complying with the tax laws; (2) the violation is due to an unintentional mistake of fact; and (3) imposing the penalty would be against equity and good conscience.
1427 Section 6707 provides a penalty in the amount of $50,000. If the penalty is with respect to a listed transaction, the amount of the penalty is increased to the greater of (1) $200,000, or (2) 50 percent of the gross income of such person with respect to aid, assistance, or advice which is provided with respect to the transaction before the date the information return that includes the transaction is filed. Intentional disregard by a material advisor of the requirement to disclose a listed transaction increases the penalty to 75 percent of the gross income.
1437 Section 6707(c) incorporates by reference the provisions of section 6707A(d), which details the extent of the Commissioner's authority to rescind the penalty.
1438 AJCA provides: "The Commissioner of Internal Revenue shall annually report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate-- "(1) a summary of the total number and aggregate amount of penalties imposed, and rescinded, under section 6707A of the Internal Revenue Code of 1986, and
1440 Sec. 6501(c)(10) provides that the limitations period with respect to tax attributable to a listed transaction shall not expire less than one year after the required disclosure of that transaction is furnished by the taxpayer or by the material advisor, whichever is earlier.
1446 Sec. 6331(a). Levy specifically refers to the legal process by which the IRS orders a third party to turn over property in its possession that belongs to the delinquent taxpayer named in a notice of levy.
1449 Sec. 6330. The administrative hearing is referred to as the CDP hearing.
1451 Secs. 6330(a)(3) and 6331(d)(4). In practice, the notice of intent to levy and the collections due process notice is provided together in one document, Letter 1058, Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing. Chief Couns. Adv. 2009041 (November 28, 2008).
1453 Secs. 6331(d)(3) and 6861.
1459 Sec. 6331(h). With respect to Federal payments to vendors of goods or services (not defined), the continuous levy may be up to 100 percent of each payment. Sec. 6331(h)(3).
1460 Government Accountability Office, Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax System (GAO-07-742T), April 19, 2007 (approximately 60,000 Federal contractors were delinquent on over $7 billion in Federal taxes).
1462 That is, a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of its employees or their beneficiaries.
1463 That is, an annuity purchased by a section 501(c)(3) organization or a public school.
1467 The dollar limit is indexed for inflation.
1468 For taxable years beginning before January 1, 2010, such a conversion is not permitted to be made by a taxpayer whose modified adjusted gross income for the year of the distribution exceeds $100,000 (or who, if married, does not file jointly). For taxable years beginning before January 1, 2010, a rollover from an eligible employer plan not made from a designated Roth account is available only to a taxpayer whose modified adjusted gross income for the year of the distribution does not exceed $100,000 (and who, if married, files jointly).
1470 Qualified retirement plans include plans qualified under section 401(a) and section 403(a) annuity plans.
1471 Section 403(b) plans may be maintained only by (1) tax-exempt charitable organizations, and (2) educational institutions of State or local governments (including public schools). Many of the rules that apply to section 403(b) plans are similar to the rules applicable to qualified retirement plans, including section 401(k) plans.
1472 Rev. Rul. 71-295, 1971-2, C.B. 184 and Treas. Reg. sec. 1.401(b)(1)(ii).
1473 Treas. Reg. sec. 1.401(k)-1(f)(1)(i).
1474 A governmental section 457(b) plan is an eligible section 457(b) plan maintained by a governmental employer described in section 457(e)(1)(A).
1476 Section 402(c)(10) allows nonspouse beneficiaries to make a direct rollover to an IRA but not another eligible employer plan.
1477 For taxable years beginning before January 1, 2010, a rollover from an eligible employer plan not made from a designated Roth account is available only to a taxpayer whose modified adjusted gross income for the year of the distribution does not exceed $100,000 (and who, if married, files jointly).
1478 Prior to enactment of section 824 of the Pension Protection Act of 2006, P.L. No. 109-280, an eligible rollover distribution from an eligible employer plan not made from a designated Roth account could be rolled over to a non-Roth IRA and then converted to a Roth IRA, but could not be rolled over to a Roth IRA without an intervening rollover to a non-Roth IRA followed by a conversion to a Roth IRA. See Notice 2008-30, 2008-12 I.R.B. 638.
1479 Treas. Reg. sec. 1.402(a)-1(a)(iii).
1480 Notice 2009-75, 2009-39 I.R.B. 436.
1481 Sec. 408A(d)(3)(F), Treas. Reg. sec. 1.408A-6 A-5, and Notice 2008-30, Q&A-3.
1482 The bill includes a provision which adds governmental section 457(b) plans to the plans that are permitted to include a designated Roth program. See explanation of section 211 of the bill.
1483 See section 401(b), Treas. Reg. sec 1.401(b)-1, and Rev. Proc. 2007-44, 2007-2 CB 54, regarding remedial amendment periods for plan amendments.
1484 If an annuity contract is held by a corporation or by any other person that is not a natural person, the income on the contract is treated as ordinary income accrued by the contract owner and is subject to current taxation. The contract is not treated as an annuity contract. Sec. 72(u).
1487 Sec. 72(e). By contrast to distributions under an annuity contract, distributions from a life insurance contract (other than a modified endowment contract) that are made prior to the death of the insured generally are includible in income, to the extent that the amounts distributed exceed the taxpayer's basis in the contract; such distributions generally are treated first as a tax-free recovery of basis, and then as income (sec. 72(e)). In the case of a modified endowment contract, however, in general, distributions are treated as income first, loans are treated as distributions (i.e., income rather than basis recovery first), and an additional 10 percent tax is imposed on the income portion of distributions made before age 591/2 and in certain other circumstances (secs. 72(e) and (v)). A modified endowment contract is a life insurance contract that does not meet a statutory "7-pay" test, i.e., generally is funded more rapidly than seven annual level premiums. Sec. 7702A.
1492 Conway v. Comm'r, 111 T.C. 350 (1998), acq., 1999-2 C.B. xvi.
1493 Rev. Proc. 2008-24, 2008-13 I.R.B. 684. The Rev. Proc. further provides that a transfer does not, however, qualify as a tax-free exchange if the payment is a distribution that is part of a series of substantially equal periodic payments, or if the payment is a distribution under an immediate annuity. The Treasury guidance further provides that if a direct transfer of a portion of an annuity contract for a second annuity contract does not qualify as a tax-free exchange under section 1035, it is treated as a taxable distribution followed by a payment for the second contract. The 2011 Priority Guidance Plan for the Treasury Department and IRS anticipates further guidance on this issue.
1494 Secs. 72(b), (c), and (e).
1495 In the case of cellulosic biofuel that is alcohol, the $1.01 credit amount is reduced by the credit amount of the alcohol mixture credit, and for ethanol, the credit amount for small ethanol producers, as in effect at the time the cellulosic biofuel fuel is produced.
1496 Water content (including both free water and water in solution with dissolved solids) is determined by distillation, using for example ASTM method D95 or a similar method suitable to the specific fuel being tested. Sediment consists of solid particles that are dispersed in the liquid fuel and is determined by centrifuge or extraction using, for example, ASTM method D1796 or D473 or similar method that reports sediment content in weight percent. Ash is the residue remaining after combustion of the sample using a specified method, such as ASTM D3174 or a similar method suitable for the fuel being tested.
1497 See sections 40A(d)(1), 40A(f)(3), and 6426(h).
1498 Secs. 864(c), 871(b), 873, 882(a) and 882(c).
1502 Secs. 1441 and 1442 provide for collection from nonresident aliens and foreign corporations, respectively.
1503 Under section 861(a)(3), compensation for personal services performed in the United States is U.S. source, unless the individual performing the services is a nonresident alien who is temporarily present in the United States, receives no more than $3,000 of compensation and is performing the services for a foreign person not engaged in a U.S. trade or business. Conversely, section 862(a)(3) provides that compensation for labor or services performed outside the United States is foreign source.
1504 Secs. 861(a)(1), 862(a)(1).
1506 Hunt v. Commissioner, 90 T.C. 1289 (1988).
1507 Manning v. Commissioner, 614 F.2d 815 (1st Cir. 1980); Bank of America v. United States, 230 Ct. Cl. 679, 680 F.2d 142 (1982), aff'g in part, rev'g in part, 47 AFTR 2d 81-652 (Ct. Cl. 1981).
1508 Container Corp. v. Commissioner, 134 T.C. No. 5 (February 17, 2010), gov't notice of appeal filed (5th Cir. June 1, 2010).
1510 Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(a); Health Care and Education Reconciliation Act of 2010, Pub L. No. 111-152, sec. 1410; Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec.561(1); Act to extend the Generalized System of Preferences and the Andean Trade Preference Act, and for other purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
1511 Firearms Excise Tax Improvement Act of 2010, Pub. L. No. 111-237, sec. 4(a); United States Manufacturing Enhancement Act of 2010, Pub. L. No. 111-227, sec. 4002; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-210; sec. 3; Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(b); Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561(2).
1512 Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561(3).
1513 All the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
1514 H.R. 4783. The bill passed the House on March 10, 2010. The Senate passed the bill with amendments on November 19, 2010. The House agreed to the Senate amendments on November 30, 2010. The President signed the bill on December 8, 2010.
1515 Squire v. Capoeman, 351 U.S. 1, 6 (1956). Per capita payments of net revenues from gaming activities conducted or licensed by any Indian tribe are specifically made subject to Federal taxes by the Indian Gaming Regulatory Act, 25 U.S.C. sec. 2710(b)(3)(D), Pub. L. No. 100-497 (Oct. 17, 1988).
1516 Sec. 7873 (exemption of income from treaty fishing rights).
1517 Section 5 of the General Allotment Act of 1887, as amended, provided for tribal lands to be allotted to individual Indians in trust for a period of years, after which the lands were to be conveyed to the allottees in fee "free of all charge or incumbrance whatsoever." 25 U.S.C. sec. 348. This provision has been interpreted to prevent taxation of income or capital gains "derived directly" from allotted land while it remains in trust. Squire v. Capoeman, 351 U.S. 1 (1956); Rev. Rul. 57-407, 1957-2 C.B. 45 (any gain from the sale or exchange of the land while it is still held in trust is not subject to tax); Rev. Rul. 67-284, 1967-2 C.B. 55 (lists several types of income that will be treated as "derived directly" from allotted land, including rentals (including crop rentals), royalties, and proceeds from the sale of natural resources from the land. A number of courts have held that the exclusion is only available for income derived from land allotted to the individual earning the income and is not available for income derived from land leased from the tribe or another individual to whom the land is allotted. See Kieffer v. Comm'r, T.C. 1998-202; Anderson v. United States, 845 F.2d 206 (9th Cir. 1988); Holt v. Comm'r, 364 F.2d 38 (8th Cir. 1966); but see Campbell v. Comm'r, T.C. Memo 1997-502 at 19. The exclusion does not extend to income derived from the reinvestment of income derived from allotted land. Capoeman, 351 U.S. at 9.
1518 Capoeman applies to allotments issued pursuant to tribe-specific allotment statues, regardless of whether the General Allotment Act applies to those allotments. See United States v. Hallam, 304 F.2d 629 (10th Cir. 1962) (income from Quapaw allotments in form of rents, royalties, and proceeds from restricted allotted lands exempt); Stevens v. Commissioner, 452 F.2d 741 (9th Cir. 1971) (construing Ft. Belknap Allotment Act to find farming and ranching income exempt); Big Eagle v. United States, 300 F.2d 765 (Ct. Cl. 1962) (receiving royalties from tribal mineral deposits exempt by virtue of Osage Allotment Act); Rev. Rul. 74-13, 1974-1 C.B. 14 (exemption described as applying to restricted lands generally rather than specifically to General Allotment Act lands).
1519 Sec. 6402(f) authorizes offsets of unemployment compensation debts against refunds payable for the ten year period beginning after September 30, 2008. Other non-Federal tax debts that may be claimed against overpayments of Federal tax liability include past-due support within the meaning of the Social Security Act, debts owed to Federal agencies and State income tax obligations. Sec. 6402(c)-(e).
1526 H.R. 4853. The Act originated as a bill relating to the Airport and Airway Trust Fund and passed the House on the suspension calendar on March 17, 2010. The Senate passed the bill with an amendment on September 23, 2010. The House agreed to the Senate amendment with an amendment substituting the text of the "Middle Class Tax Relief Act of 2010" on December 2, 2010. The Senate agreed to the House amendment to the Senate amendment with an amendment substituting the text of the "Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010" on December 15, 2010. The House agreed to the Senate amendment to the House amendment to the Senate amendment on December 16, 2010. The President signed the bill on December 17, 2010. For a technical explanation of the Act prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of the Revenue Provisions Contained in the "Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010" Scheduled for Consideration by the United States Senate (JCX 55-10), December 10, 2010.
1529 Section 101 of the Act extends the EGTRRA modifications to the provision. Section 103 of the Act extends the modifications to the provision (including reduction in the earnings threshold for the refundable portion of the child tax credit to $3,000). See Title I, section J for additional discussion of the child tax credit, below.
1530 The $5,000 amount, which is indexed for inflation annually, also reflects the increase from $3,000 to $5,000 described more fully in Title I, section K of this document, below.
1533 The exclusion has not always applied to graduate courses. The exclusion was first made inapplicable to graduate-level courses by the Technical and Miscellaneous Revenue Act of 1988. The exclusion was reinstated with respect to graduate-level courses by the Omnibus Budget Reconciliation Act of 1990, effective for taxable years beginning after December 31, 1990. The exclusion was again made inapplicable to graduate-level courses by the Small Business Job Protection Act of 1996, effective for courses beginning after June 30, 1996. The exclusion for graduate-level courses was reinstated by EGTRRA, although that change does not apply to taxable years beginning after December 31, 2010 (under EGTRRA's sunset provision).
1535 The exclusion was first enacted as part of the Revenue Act of 1978 (with a 1983 expiration date).
1536 Treas. Reg. sec. 1.162-5.
1539 In addition, Coverdell education savings accounts are subject to the unrelated business income tax imposed by section 511.
1540 This 10-percent additional tax does not apply if a distribution from an education savings account is made on account of the death or disability of the designated beneficiary, or if made on account of a scholarship received by the designated beneficiary.
1541 Qualified higher education expenses are defined in the same manner as for qualified tuition programs.
1543 The exclusion from gross income for interest on State and local bonds does not apply to any arbitrage bond (sec. 103(a), (b)(2)). A bond is an arbitrage bond if it is part of an issue that violates the restrictions against investing in higher-yielding investments under section 148(a) or that fails to satisfy the requirement to rebate arbitrage earnings under section 148(f).
1544 Ninety-five percent or more of the net proceeds of governmental bond issue are to be used for local governmental activities of the issuer. Sec. 148(f)(4)(D).
1545 Under the Treasury regulations, an issuer may apply a fact-based rather than an expectations-based test. Treas. Reg. sec. 1.148-8(c)(1).
1547 The Code provides that the exclusion from gross income does not apply to interest on private activity bonds that are not qualified bonds within the meaning of section 141. See secs. 103(b)(1), 141.
1549 EGTRRA increased the maximum credit and exclusion to $10,000 (indexed for inflation after 2002) for both non-special needs and special needs adoptions, increased the phase-out starting point to $150,000 (indexed for inflation after 2002), and allowed the credit against the AMT. Section 10909 of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148: (1) extended the EGTRRA expansion of the adoption credit and exclusion from income for employer-provided adoption assistance for one year (for 2011); (2) increased by $1,000 (to $13,170, indexed for inflation) the maximum adoption credit and exclusion from income for employer-provided adoption assistance for two years (2010 and 2011); and (3) made the credit refundable for two years (2010 and 2011).
1550 The changes to the adoption credit and exclusion from employer-provided adoption assistance for 2010 and 2011 (relating to the $1,000 increase in the maximum credit and exclusion and the refundability of the credit) enacted as part of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, are not extended by the provision.
1552 With certain exceptions, once an Alaska Native Corporation has made a conveyance to a Settlement Trust, the assets conveyed shall not be subject to attachment, distraint, or sale or execution of judgment, except with respect to the lawful debts and obligations of the Settlement Trust.
1553 These provisions were enacted by section 671 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, scheduled to sunset in taxable years beginning after December 31, 2010. See H.R. Rep. No. 107-84 (2001).
1554 In addition, for taxable years beginning before 2011, amounts treated as ordinary income on the disposition of certain preferred stock (sec. 306) are treated as dividends for purposes of applying the reduced rates; the tax rate for the accumulated earnings tax (sec. 531) and the personal holding company tax (sec. 541) is reduced to 15 percent; and the collapsible corporation rules (sec. 341) are repealed.
1555 The rule applicable to the child credit after 2010 is subject to the EGTRRA sunset. The adoption credit is refundable in 2010 and 2011 and beginning in 2012 is nonrefundable and treated for purposes of the AMT in the same manner as the child credit.
1560 There is an exception to the rule that assets subject to the Federal estate tax receive stepped-up basis in the case of "income in respect of a decedent." Sec. 1014(c). The basis of assets that are "income in respect of a decedent" is a carryover basis (i.e., the basis of such assets to the estate or heir is the same as it was in the hands of the decedent) increased by estate tax paid on that asset. Income in respect of a decedent includes rights to income that has been earned, but not recognized, by the date of death (e.g., wages that were earned, but not paid, before death), individual retirement accounts (IRAs), and assets held in accounts governed by section 401(k).
1566 Secs. 2056(d)(1) & 2523(i)(1).
1569 Sec. 2057. The qualified family-owned business deduction and the unified credit effective exemption amount are coordinated. If the maximum deduction amount of $675,000 is elected, then the unified credit effective exemption amount is $625,000, for a total of $1.3 million. Because of the coordination between the qualified family-owned business deduction and the unified credit effective exemption amount, the qualified family-owned business deduction would not provide a benefit in any year in which the applicable exclusion amount exceeds $1.3 million.
1571 Rev. Proc. 2009-50, I.R.B. 2009-45 (Nov. 9, 2009).
1577 The provision clarifies current law regarding the computation of estate and gift taxes. Under present law, the gift tax on taxable transfers for a year is determined by computing a tentative tax on the cumulative value of current year transfers and all gifts made by a decedent after December 31, 1976, and subtracting from the tentative tax the amount of gift tax that would have been paid by the decedent on taxable gifts after December 31, 1976, if the tax rate schedule in effect in the current year had been in effect on the date of the prior-year gifts. Under the provision, for purposes of determining the amount of gift tax that would have been paid on one or more prior year gifts, the estate tax rates in effect under section 2001(c) at the time of the decedent's death are used to compute both (1) the gift tax imposed by chapter 12 with respect to such gifts, and (2) the unified credit allowed against such gifts under section 2505 (including in computing the applicable credit amount under section 2505(a)(1) and the sum of amounts allowed as a credit for all preceding periods under section 2505(a)(2)).
1578 The $5 million generation skipping transfer tax exemption is available in 2010 regardless of whether the executor of an estate of a decedent who dies in 2010 makes the election described below to apply the EGTRRA 2010 estate tax rules and section 1022 basis rules.
1580 Therefore, an heir who acquires an asset from the estate of a decedent who died in 2010 and whose executor elected application of the 2010 EGTRRA rules has a basis in the asset determined under the modified carryover basis rules of section 1022. Such basis is applicable for the determination of any gain or loss on the sale or disposition of the asset in any future year regardless of the status of the sunset provision described below.
1581 The provision does not allow a surviving spouse to use the unused generation skipping transfer tax exemption of a predeceased spouse.
1582 The last deceased spouse limitation applies whether or not the last deceased spouse has any unused exclusion or the last deceased spouse's estate makes a timely election.
1583 Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules regarding whether an item must be capitalized under section 263 or section 263A.
1584 Assume that the cost of the property is not eligible for expensing under section 179.
1585 The additional first-year depreciation deduction is not available for any property that is required to be depreciated under the alternative depreciation system of MACRS. The additional first-year depreciation deduction is also not available for qualified New York Liberty Zone leasehold improvement property as defined in section 1400L(c)(2).
1586 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer. If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).
1587 A special rule applies in the case of certain leased property. In the case of any property that is originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the taxpayer within three months after the date that the property was placed in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback. If property is originally placed in service by a lessor, such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale.
1588 Property qualifying for the extended placed in service date must have an estimated production period exceeding one year and a cost exceeding $1 million.
1589 Property does not fail to qualify for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect prior to January 1, 2008.
1590 For purposes of determining the amount of eligible progress expenditures, it is intended that rules similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply.
1591 Sec. 168(k)(4). In the case of an electing corporation that is a partner in a partnership, the corporate partner's distributive share of partnership items is determined as if section 168(k) does not apply to any eligible qualified property and the straight line method is used to calculate depreciation of such property.
1592 Special rules apply to an applicable partnership.
1593 For this purpose, bonus depreciation is the difference between (i) the aggregate amount of depreciation for all eligible qualified property determined if section 168(k)(1) applied using the most accelerated depreciation method (determined without regard to this provision), and shortest life allowable for each property, and (ii) the amount of depreciation that would be determined if section 168(k)(1) did not apply using the same method and life for each property.
1594 In the case of passenger aircraft, the written binding contract limitation does not apply.
1595 Special rules apply to property manufactured, constructed, or produced by the taxpayer for use by the taxpayer.
1596 In computing the maximum amount, the maximum increase amount for extension property is reduced by bonus depreciation amounts for preceding taxable years only with respect to extension property.
1597 It is intended that, in the case of qualified property that is acquired by the taxpayer after September 8, 2010 and placed in service by the taxpayer in 2012 and that is eligible for 100 percent bonus depreciation by reason of the extended placed in service date provided in section 168(k)(5), the 100 percent bonus deprecation applies only to the extent of the adjusted basis of the property attributable to manufacture, construction, or production before January 1, 2012. It is also intended that a taxpayer may elect 50 percent (rather than 100 percent) bonus depreciation with respect to all property in any class of property placed in service during a taxable year. Finally, it is intended that section 168(k)(5) does not apply to passenger automobiles subject to the limitations on depreciation provided in section 280F, but that such property continues to be eligible for 50-percent bonus depreciation. Technical corrections may be necessary so that the statute reflects this intent.
1598 An electing taxpayer does not compute a bonus depreciation amount under section 168(k)(4)(C) for any bonus depreciation allowable with respect to property placed in service during 2010 except long-production period property (or certain transportation property) placed in service in 2010 that is extension property. For example, assume in its taxable year beginning October 1, 2010, and ending September 30, 2011, a corporation places into service qualified property with a total cost of $1,000,000, of which $250,000 was placed in service before December 31, 2010. The corporation computes its bonus depreciation amount under section 168(k)(4)(C) taking into account only the bonus depreciation computed with respect to the $750,000 of property placed in service after December 31, 2010.
1599 An election under new section 168(k)(4)(I) with respect to round 2 extension property is binding for any property that is eligible qualified property solely by reason of the amendments made by section 401(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (and the application of such extension to this paragraph pursuant to the amendment made by section 401(c)(1) of such Act), Pub. L. No. 111-312, even if such property is placed in service in 2012.
1600 In computing the maximum amount, the maximum increase amount for extension property or for round 2 extension property is reduced by bonus depreciation amounts for preceding taxable years only with respect to extension property or round 2 extension property, respectively.
1601 Additional section 179 incentives are provided with respect to qualified property meeting applicable requirements that is used by a business in an empowerment zone (sec. 1397A), a renewal community (sec. 1400J), or the Gulf Opportunity Zone (sec. 1400N(e)). In addition, section 179(e) provides for an enhanced section 179 deduction for qualified disaster assistance property.
1602 The definition of qualifying property was temporarily (for 2010 and 2011) expanded to include up to $250,000 of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. See section 179(f)(2).
1603 The temporary $500,000 and $2,000,000 amounts were enacted in Section 2021 of the Small Business Jobs Act of 2010, Pub. L. No. 111-240.
1604 Special rules apply to limit the carryover of unused section 179 deductions attributable to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. See section 179(f)(4).
1605 Sec. 179(c)(1). Under Treas. Reg. sec. 1.179-5, applicable to property placed in service in taxable years beginning after 2002 and before 2008, a taxpayer is permitted to make or revoke an election under section 179 without the consent of the Commissioner on an amended Federal tax return for that taxable year. This amended return must be filed within the time prescribed by law for filing an amended return for the taxable year. T.D. 9209, July 12, 2005.
1606 The temporary extension of the definition of qualifying property to include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property is not extended.
1609 Sec. 3101. For taxable years beginning after 2012, an additional HI tax applies.
1611 For taxable years beginning after 2012, an additional HI tax applies.
1614 This percentage replaces the rate of one half (50 percent) allowed under present law for this portion of the deduction. The new percentage is necessary to continue to allow the self-employed taxpayer to deduct the full amount of the employer portion of SECA taxes. The employer OASDI tax rate remains at 6.2 percent, while the employee portion falls to 4.2 percent. Thus, the employer share of total OASDI taxes is 6.2 divided by 10.4, or 59.6 percent of the OASDI portion of SECA taxes.
1617 Notice 2005-62, I.R.B. 2005-35, 443 (2005). "A biodiesel mixture is a mixture of biodiesel and diesel fuel containing at least 0.1 percent (by volume) of diesel fuel. Thus, for example, a mixture of 999 gallons of biodiesel and 1 gallon of diesel fuel is a biodiesel mixture." Ibid.
1621 Secs. 40A(f), 6426(c), and 6427(e).
1623 "Gasoline gallon equivalent" means, with respect to any nonliquid alternative fuel (for example, compressed natural gas), the amount of such fuel having a Btu (British thermal unit) content of 124,800 (higher heating value).
1624 The applicable period for a taxpayer to reinvest the proceeds is four years after the close of the taxable year in which the qualifying electric transmission transaction occurs.
1626 Sec. 3(23), 16 U.S.C. 796, defines "transmitting utility" as any electric utility, qualifying cogeneration facility, qualifying small power production facility, or Federal power marketing agency which owns or operates electric power transmission facilities which are used for the sale of electric energy at wholesale.
1627 Sec. 3(22), 16 U.S.C. 796, defines "electric utility" as any person or State agency (including any municipality) which sells electric energy; such term includes the Tennessee Valley Authority, but does not include any Federal power marketing agency.
1628 For example, a regional transmission organization, an independent system operator, or an independent transmission company.
1633 The American Petroleum Institute gravity, or API gravity, is a measure of how heavy or light a petroleum liquid is compared to water.
1634 Sec. 45. In addition to the renewable electricity production credit, section 45 also provides income tax credits for the production of Indian coal and refined coal at qualified facilities.
1636 With the exception of biomass fuel property, property placed in service after December 31, 2008 and prior to February 17, 2009 qualifies for the new 30 percent credit rate (and $1,500 aggregate cap) if it met the efficiency standards of prior law for property placed in service during 2009. Biomass fuel property placed in service at any point in 2009 is governed by the new efficiency standard.
1637 This reference to the 2000 International Energy Conservation Code is superseded by the additional requirements described in the paragraph below regarding building envelope components.
1638 These standards are a seasonal energy efficiency ratio ("SEER") greater than or equal to 15, an energy efficiency ratio ("EER") greater than or equal to 12.5, and heating seasonal performance factor ("HSPF") greater than or equal to 8.5 for split heat pumps, and SEER greater than or equal to 14, EER greater than or equal to 12, and HSPF greater than or equal to 8.0 for packaged heat pumps.
1639 These standards are a SEER greater than or equal to 16 and EER greater than or equal to 13 for split systems, and SEER greater than or equal to 14 and EER greater than or equal to 12 for packaged systems.
1640 These standards are a seasonal energy efficiency ratio ("SEER") greater than or equal to 15, an energy efficiency ratio ("EER") greater than or equal to 12.5, and heating seasonal performance factor ("HSPF") greater than or equal to 8.5 for split heat pumps, and SEER greater than or equal to 14, EER greater than or equal to 12, and HSPF greater than or equal to 8.0 for packaged heat pumps.
1641 These standards are a SEER greater than or equal to 16 and EER greater than or equal to 13 for split systems, and SEER greater than or equal to 14 and EER greater than or equal to 12 for packaged systems.
1644 Secs. 170, 2055, and 2522, respectively.
1645 Secs. 170(f)(3)(B)(iii) and 170(h).
1648 Secs. 170(b)(1)(E)(vi) and 170(b)(2)(B)(iii).
1650 The deduction generally is not available for expenses with respect to a course or education involving sports, games, or hobbies, and is not available for student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual's academic course of instruction.
1651 Secs. 222(d)(1) and 25A(g)(2).
1652 Sec. 222(c). These reductions are the same as those that apply to the Hope and Lifetime Learning credits.
1657 Sec. 170(f)(8). For any contribution of a cash, check, or other monetary gift, no deduction is allowed unless the donor maintains as a record of such contribution a bank record or written communication from the donee charity showing the name of the donee organization, the date of the contribution, and the amount of the contribution. Sec. 170(f)(17).
1659 Secs. 170(f), 2055(e)(2), and 2522(c)(2).
1661 Minimum distribution rules also apply in the case of distributions after the death of a traditional or Roth IRA owner.
1662 Conversion contributions refer to conversions of amounts in a traditional IRA to a Roth IRA.
1664 Sec. 408(d)(8). The exclusion does not apply to distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pensions ("SEPs").
1665 Sec. 2031. The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") repealed the estate tax for estates of decedents dying after December 31, 2009. EGTRRA, however, included a termination provision under which EGTRRA's rules, including estate tax repeal, do not apply to estates of decedents dying after December 31, 2010.
1668 Sec. 2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
1670 Secs. 132(f), 3121(b)(2), and 3306(b)(16) and 3401(a)(19).
1672 Sec. 203 of the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16.
1674 Sec. 1001(c) of the American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5.
1679 The Small Business Job Protection Act of 1996, Pub. L. No. 104-188, expanded the definition of start-up firms under section 41(c)(3)(B)(i) to include any firm if the first taxable year in which such firm had both gross receipts and qualified research expenses began after 1983. A special rule (enacted in 1993) is designed to gradually recompute a start-up firm's fixed-base percentage based on its actual research experience. Under this special rule, a start-up firm is assigned a fixed-base percentage of three percent for each of its first five taxable years after 1993 in which it incurs qualified research expenses. A start-up firm's fixed-base percentage for its sixth through tenth taxable years after 1993 in which it incurs qualified research expenses is a phased-in ratio based on the firm's actual research experience. For all subsequent taxable years, the taxpayer's fixed-base percentage is its actual ratio of qualified research expenses to gross receipts for any five years selected by the taxpayer from its fifth through tenth taxable years after 1993. Sec. 41(c)(3)(B).
1682 Under a special rule, 75 percent of amounts paid to a research consortium for qualified research are treated as qualified research expenses eligible for the research credit (rather than 65 percent under the general rule under section 41(b)(3) governing contract research expenses) if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6) and is organized and operated primarily to conduct scientific research, and (2) such qualified research is conducted by the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
1685 Taxpayers may elect 10-year amortization of certain research expenditures allowable as a deduction under section 174(a). Secs. 174(f)(2) and 59(e).
1691 Section 45D was added by section 121(a) of the Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
1710 Section 3306(b) defines wages for purposes of Federal Unemployment Tax.
1713 This date is the date of enactment of the Heroes Earnings Assistance and Relief Tax Act of 2008, Pub. L. No. 110-245.
1716 Property that satisfies the definition of both qualified leasehold improvement property and qualified restaurant property is eligible for bonus depreciation.
1717 Improvements to portions of a building not open to the general public (e.g., stock room in back of retail space) do not qualify under the provision.
1718 Property that satisfies the definition of both qualified leasehold improvement property and qualified retail property is eligible for bonus depreciation.
1722 For these purposes, related persons is defined in Sec. 465(b)(3)(C).
1730 Sec. 170(e)(3)(A)(i)-(iii).
1732 Treas. Reg. sec. 1.170A-4A(c)(3).
1733 Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) (holding that the value of surplus bread inventory donated to charity was the full retail price of the bread rather than half the retail price, as the IRS asserted).
1735 The 10 percent limitation does not affect the application of the generally applicable percentage limitations. For example, if 10 percent of a sole proprietor's net income from the proprietor's trade or business was greater than 50 percent of the proprietor's contribution base, the available deduction for the taxable year (with respect to contributions to public charities) would be 50 percent of the proprietor's contribution base. Consistent with present law, such contributions may be carried forward because they exceed the 50 percent limitation. Contributions of food inventory by a taxpayer that is not a C corporation that exceed the 10 percent limitation but not the 50 percent limitation could not be carried forward.
1739 Sec. 170(e)(3)(A)(i)-(iii)
1741 Treas. Reg. sec. 1.170A-4A(c)(3).
1746 If the taxpayer constructed the property and reacquired such property, the contribution must be within three years of the date the original construction was substantially completed. Sec. 170(e)(6)(D)(i).
1747 This requirement does not apply if the property was reacquired by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
1750 The definition of qualifying property was temporarily (for 2010 and 2011) expanded to include up to $250,000 of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. See section 179(c).
1752 Sec. 312(k)(3). Section 56(g)(4)(C)(i) does not apply to a deduction under section 179E (or under sections 179, 179A, 179B, and 179D), as such deduction is permitted for purposes of computing earnings and profits.
1757 See Temp. Treas. Reg. section 1.181-2T for rules on making an election under this section.
1758 For this purpose, a production is treated as commencing on the first date of principal photography.
1767 Treas. Reg. sec. 1.162-4.
1768 Treas. Reg. sec. 1.263(a)-1(b).
1771 Pub. L. No. 96-510 (1980).
1772 Qualifying production property generally includes any tangible personal property, computer software, and sound recordings.
1773 Qualified film includes any motion picture film or videotape (including live or delayed television programming, but not including certain sexually explicit productions) if 50 percent or more of the total compensation relating to the production of the film (including compensation in the form of residuals and participations) constitutes compensation for services performed in the United States by actors, production personnel, directors, and producers.
1774 For purposes of the provision, "wages" include the sum of the amounts of wages as defined in section 3401(a) and elective deferrals that the taxpayer properly reports to the Social Security Administration with respect to the employment of employees of the taxpayer during the calendar year ending during the taxpayer's taxable year.
1775 Section 3401(a)(8)(C) excludes wages paid to United States citizens who are bona fide residents of Puerto Rico from the term wages for purposes of income tax withholding.
1782 Secs. 871(k), 881, 1441 and 1442.
1783 Sections 857(b)(3)(F), 852(b)(3)(E), and 871(k)(2)(E) require dividend treatment, rather than capital gain treatment, for certain distributions to which FIRPTA does not apply by reason of this exception. See also section 881(e)(2).
1786 Prop. Treas. Reg. sec. 1.953-1(a).
1787 Temporary exceptions from the subpart F provisions for certain active financing income applied only for taxable years beginning in 1998. Taxpayer Relief Act of 1997, Pub. L. No. 105-34. Those exceptions were modified and extended for one year, applicable only for taxable years beginning in 1999. The Tax and Trade Relief Extension Act of 1998, Pub. L. No. 105-277. The Tax Relief Extension Act of 1999, Pub. L. No. 106-170, clarified and extended the temporary exceptions for two years, applicable only for taxable years beginning after 1999 and before 2002. The Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, modified and extended the temporary exceptions for five years, for taxable years beginning after 2001 and before 2007. The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, extended the temporary provisions for two years, for taxable years beginning after 2006 and before 2009. The Energy Improvement and Extension Act of 2008, Pub. L. No. 110-343, extended the temporary provisions for one year, for taxable years beginning after 2008 and before 2010.
1792 The targeted areas are those that have pervasive poverty, high unemployment, and general economic distress, and that satisfy certain eligibility criteria, including specified poverty rates and population and geographic size limitations.
1795 The urban part of the program is administered by the HUD and the rural part of the program is administered by the USDA. The eight Round I urban empowerment zones are Atlanta, GA; Baltimore, MD, Chicago, IL; Cleveland, OH; Detroit, MI; Los Angeles, CA; New York, NY; and Philadelphia, PA/Camden, NJ. Atlanta relinquished its empowerment zone designation in Round III. The three Round I rural empowerment zones are Kentucky Highlands, KY; Mid-Delta, MI; and Rio Grande Valley, TX. The 15 Round II urban empowerment zones are Boston, MA; Cincinnati, OH; Columbia, SC; Columbus, OH; Cumberland County, NJ; El Paso, TX; Gary/Hammond/East Chicago, IN; Ironton, OH/Huntington, WV; Knoxville, TN; Miami/Dade County, FL; Minneapolis, MN; New Haven, CT; Norfolk/ Portsmouth, VA; Santa Ana, CA; and St. Louis, Missouri/East St. Louis, IL. The five Round II rural empowerment zones are Desert Communities, CA; Griggs-Steele, ND; Oglala Sioux Tribe, SD; Southernmost Illinois Delta, IL; and Southwest Georgia United, GA. The eight Round III urban empowerment zones are Fresno, CA; Jacksonville, FL; Oklahoma City, OK; Pulaski County, AR; San Antonio, TX; Syracuse, NY; Tucson, AZ; and Yonkers, NY. The two Round III rural empowerment zones are Aroostook County, ME; and Futuro, TX.
1796 If an empowerment zone designation were terminated prior to December 31, 2009, the tax incentives would cease to be available as of the termination date.
1797 Sec. 1396. The $15,000 limit is annual, not cumulative such that the limit is the first $15,000 of wages paid in a calendar year which ends with or within the taxable year.
1798 Secs. 1397C(b) and 1397C(c). However, the wage credit is not available for wages paid in connection with certain business activities described in section 144(c)(6)(B), including a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack, or liquor store, or certain farming activities. In addition, wages are not eligible for the wage credit if paid to: (1) a person who owns more than five percent of the stock (or capital or profits interests) of the employer, (2) certain relatives of the employer, or (3) if the employer is a corporation or partnership, certain relatives of a person who owns more than 50 percent of the business.
1800 Secs. 1396(c)(3)(A) and 51A(d)(2).
1801 Secs. 1396(c)(3)(B) and 51A(d)(2).
1803 For each of 2010 and 2011, the 179 expensing limitation will be a total of up to $535,000. The Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 2021. See discussion in Part Fourteen of this document.
1805 Sec. 1397A(a)(2), 179(b)(2), (7). For 2008 and 2009, the limit is $800,000.
1808 Sec. 1397C(d). Excluded businesses include any private or commercial golf course, country club, massage parlor, hot tub facility, sun tan facility, racetrack, or other facility used for gambling or any store the principal business of which is the sale of alcoholic beverages for off-premises consumption. Sec. 144(c)(6).
1811 The term "qualified empowerment zone asset" means any property which would be a qualified community asset (as defined in section 1400F, relating to certain tax benefits for renewal communities) if in section 1400F: (i) references to empowerment zones were substituted for references to renewal communities, (ii) references to enterprise zone businesses (as defined in section 1397C) were substituted for references to renewal community businesses, and (iii) the date of the enactment of this paragraph were substituted for "December 31, 2001" each place it appears. Sec. 1397B(b)(1)(A).
1815 Sec. 57(a)(7). In the case of qualified small business stock, the percentage of gain excluded from gross income which is an alternative minimum tax preference is (i) seven percent in the case of stock disposed of in a taxable year beginning before 2011; (ii) 42 percent in the case of stock acquired before January 1, 2001, and disposed of in a taxable year beginning after 2010; and (iii) 28 percent in the case of stock acquired after December 31, 2000, and disposed of in a taxable year beginning after 2010.
1816 The 50 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
1817 The amount of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. The amount so included is the sum of (i) 50 percent (the percentage included in taxable income) of the total gain and (ii) the applicable preference percentage of the one-half gain that is excluded from taxable income.
1818 Sec. 760 of the Act extends the January 1, 2011, date to January 1, 2012.
1819 Secs. 1202(a)(3)(B) and 1202(a)(4)(B).
1820 For each of 2010 and 2011, the 179 expensing limitation will be a total of up to $535,000. The Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 2021. See discussion in Part Fourteen of this document.
1821 A proof gallon is a liquid gallon consisting of 50 percent alcohol. See secs. 5002(a)(10) and (11).
1823 Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
1824 Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the amount of excise tax collected from imports into the United States of articles produced in the Virgin Islands is retained by the United States under section 7652(b)(3).
1826 Secs. 7652(a)(3), (b)(3), and (e)(1).
1827 For taxable years beginning before January 1, 2006, certain domestic corporations with business operations in the U.S. possessions were eligible for the possession tax credit. Secs. 27(b), 936. This credit offset the U.S. tax imposed on certain income related to operations in the U.S. possessions. Subject to certain limitations, the amount of the possession tax credit allowed to any domestic corporation equaled the portion of that corporation's U.S. tax that was attributable to the corporation's non-U.S. source taxable income from (1) the active conduct of a trade or business within a U.S. possession, (2) the sale or exchange of substantially all of the assets that were used in such a trade or business, or (3) certain possessions investment. No deduction or foreign tax credit was allowed for any possessions or foreign tax paid or accrued with respect to taxable income that was taken into account in computing the credit under section 936.
Under the economic activity-based limit, the amount of the credit could not exceed an amount equal to the sum of (1) 60 percent of the taxpayer's qualified possession wages and allocable employee fringe benefit expenses, (2) 15 percent of depreciation allowances with respect to short-life qualified tangible property, plus 40 percent of depreciation allowances with respect to medium-life qualified tangible property, plus 65 percent of depreciation allowances with respect to long-life qualified tangible property, and (3) in certain cases, a portion of the taxpayer's possession income taxes. A taxpayer could elect, instead of the economic activity-based limit, a limit equal to the applicable percentage of the credit that otherwise would have been allowable with respect to possession business income, beginning in 1998, the applicable percentage was 40 percent.
To qualify for the possession tax credit for a taxable year, a domestic corporation was required to satisfy two conditions. First, the corporation was required to derive at least 80 percent of its gross income for the three-year period immediately preceding the close of the taxable year from sources within a possession. Second, the corporation was required to derive at least 75 percent of its gross income for that same period from the active conduct of a possession business. Sec. 936(a)(2). The section 936 credit generally expired for taxable years beginning after December 31, 2005.
1828 A corporation will qualify as an existing credit claimant if it acquired all the assets of a trade or business of a corporation that (1) actively conducted that trade or business in a possession on October 13, 1995, and (2) had elected the benefits of the possession tax credit in an election in effect for the taxable year that included October 13, 1995.
1829 The welfare-to-work tax credit was consolidated into the work opportunity tax credit in the Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, for qualified individuals who begin to work for an employer after December 31, 2006.
1831 The rule to allow unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010 to be treated as members of a targeted group is not extended.
1837 Given the differences in credit quality and other characteristics of individual issuers, the Secretary cannot set credit rates in a manner that will allow each issuer to issue tax credit bonds at par.
1838 The Veterans Administration and the Rural Housing Administration have been succeeded by the Department of Veterans Affairs and the Rural Housing Service, respectively.
1841 Sec. 57(a)(7). In the case of qualified small business stock, the percentage of gain excluded from gross income which is an alternative minimum tax preference is (i) seven percent in the case of stock disposed of in a taxable year beginning before 2011; (ii) 42 percent in the case of stock acquired before January 1, 2001, and disposed of in a taxable year beginning after 2010; and (iii) 28 percent in the case of stock acquired after December 31, 2000, and disposed of in a taxable year beginning after 2010. Section 102 of the Act extends the 2010 and 2011 dates by two years.
1842 The 50 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
1843 The amount of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. The amount so included is the sum of (i) 50 percent (the percentage included in taxable income) of the total gain and (ii) the applicable preference percentage of the one-half gain that is excluded from taxable income.
1844 The 25 percent of gain included in taxable income is taxed at a maximum rate of 28 percent.
1845 The 46 percent of gain included in alternative minimum tax is taxed at a maximum rate of 28 percent. Forty-six percent is the sum of 25 percent (the percentage of total gain included in taxable income) plus 21 percent (the percentage of total gain which is an alternative minimum tax preference).
1846 Sec. 1202(a)(4)(A) and (C).
1848 Sec. 168(k). The additional first-year depreciation deduction is subject to the general rules regarding whether an item must be capitalized under section 263 or section 263A.
1849 The additional first-year depreciation deduction is not available for any property that is required to be depreciated under the alternative depreciation system of MACRS. The additional first-year depreciation deduction is also not available for qualified New York Liberty Zone leasehold improvement property as defined in section 1400L(c)(2).
1850 The term "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer.
If in the normal course of its business a taxpayer sells fractional interests in property to unrelated third parties, then the original use of such property begins with the first user of each fractional interest (i.e., each fractional owner is considered the original user of its proportionate share of the property).
1851 A special rule applies in the case of certain leased property. In the case of any property that is originally placed in service by a person and that is sold to the taxpayer and leased back to such person by the taxpayer within three months after the date that the property was placed in service, the property would be treated as originally placed in service by the taxpayer not earlier than the date that the property is used under the leaseback.
If property is originally placed in service by a lessor, such property is sold within three months after the date that the property was placed in service, and the user of such property does not change, then the property is treated as originally placed in service by the taxpayer not earlier than the date of such sale.
1852 Property qualifying for the extended placed in service date must have an estimated production period exceeding one year and a cost exceeding $1 million.
1853 Property does not fail to qualify for the additional first-year depreciation merely because a binding written contract to acquire a component of the property is in effect prior to January 1, 2008.
1854 For purposes of determining the amount of eligible progress expenditures, it is intended that rules similar to section 46(d)(3) as in effect prior to the Tax Reform Act of 1986 apply.
1855 Generally, property described in section 168(k)(2)(A)(i) is (1) property to which the general rules of the Modified Accelerated Cost Recovery System ("MACRS") apply with an applicable recovery period of 20 years or less, (2) computer software other than computer software covered by section 197, (3) water utility property (as defined in section 168(e)(5)), or (4) certain leasehold improvement property.
1856 H.R. 4337. The House passed H.R. 4337 on September 28, 2010. The Senate passed the bill with an amendment on December 8, 2010. The House agreed to the Senate amendment on December 15, 2010. The President signed the bill on December 22, 2010. For a technical explanation of the bill prepared by the staff of the Joint Committee on Taxation, see Technical Explanation of H.R. 4337, "The Regulated Investment Company Modernization Act of 2010," For Consideration on the Floor of the House of Representatives (JCX-49-10), September 28, 2010.
1864 Capital gain net income is the excess of gains from the sale or exchange of capital assets over losses from such sales or exchanges. Sec. 1222(9).
1867 Sec. 1212(b). Adjustments are made to take account of the $3,000 amount allowed against ordinary income.
1868 For earnings and profits treatment of a RIC's net capital loss, see section 302 of the Act.
1869 The present-law treatment of net capital losses arising in taxable years beginning before the date of enactment (December 22, 2010) continues to apply.
1875 Section 2(a)(36) of the Investment Company Act of 1940 defines a "security" as "any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."
1876 A "qualified publicly traded partnership" means a publicly traded partnership (within the meaning of section 7704(b)), other than a publicly traded partnership whose gross income is qualifying income (other than income of another publicly traded partnership). Sec. 851(h).
1877 Sec. 852(b)(3)(B). This provision applies only with respect to RICs which meet the requirements of section 852(a) for the taxable year.
1879 Sec. 852(b)(3)(C). If there is an increase in the amount by which a RIC's net capital gain exceeds the deduction for dividends paid (determined with reference to capital gain dividends only) as a result of a "determination," the RIC has 120 days after the date of the determination to make a designation with respect to such increase. A determination is defined in section 860(e) as: (1) a decision by the Tax Court, or a judgment, decree, or other order by any court of competent jurisdiction, which has become final; (2) a closing agreement made under section 7121; (3) under regulations prescribed by the Secretary, an agreement signed by the Secretary and by, or on behalf of, the qualified investment entity relating to the liability of such entity for tax; or (4) a statement by the taxpayer attached to its amendment or supplement to a return of tax for the relevant tax year. See Rev. Proc. 2009-28, 2009-20 I.R.B. 1011.
1883 The "excess reported amount" is the excess of the aggregate amount reported as capital gain dividends for the taxable year over the RIC's net capital gain for the taxable year.
1884 The "post-December reported amount" is the aggregate amount reported with respect to items arising after December 31 of the RIC's taxable year.
1885 The Act does not change the method of designation of undistributed capital gain taken into account by shareholders under section 852(b)(3)(D)(i).
1886 Each amendment to a provision relating to qualified dividends of individual shareholders will sunset when the provision to which the amendment was made sunsets pursuant to section 303 of the Jobs and Growth Tax Relief Reconciliation Act. Under present law, these provisions sunset in taxable years beginning after December 31, 2012.
1887 Sec. 852(c)(1). The provision applies to a RIC without regard to whether it meets the requirements of section 852(a) for the taxable year.
1888 See explanation of section 101 of the Act for the treatment of carryovers of a net capital loss under present law and as amended by the Act.
1890 For a description of exempt-interest dividends, see explanation of section 301 of the Act.
1892 See section 19 of the Investment Company Act of 1940, as amended, for rules requiring notice to shareholders identifying source of distribution.
1894 Treas. Reg. sec. 1.316-2(b).
1899 United States v. Davis, 397 U.S. 301 (1970).
1903 See, for example, section 18 of the Investment Company Act of 1940.
1904 See explanation of section 301 of the Act.
1906 Section 852(b)(3)(C). Certain RICs with taxable years ending with the month of November or December are not subject to this rule.
1907 The last sentence of Sec. 852(b)(3)(C).
1911 Treas. Reg. sec. 1.852-11.
1912 Special rules apply to certain RICs with taxable years ending with the month of November or December.
1913 The principles of Treasury Regulation section 1.852-11 are to apply to a qualified late-year loss for which an election is made under this provision, subject to any subsequent change in the regulations.
1914 See explanation of section 402 of the Act.
1916 See Rev. Rul. 94-62, 1994-2 C.B. 164, as supplemented by Rev. Rul. 2007-58, I.R.B. 2007-37 (Sept. 10, 2007).
1917 See present-law explanation of section 401 for a description of the tax.
1919 See Treas. Reg. sec. 1.1275-4(b)(9)(v).
1921 Sec. 852(b)(8) and (10). See Treas. Reg. sec. 1.852-11 for rules relating to the treatment of losses attributable to periods after October 31 of a taxable year.
1923 For treatment of these losses for income tax purposes, see section 852(b)(8) of the Code, as amended by section 308 of the Act.
1924 See present-law explanation of section 401 for a description of the tax.
1930 H.R. 6517. The House passed H.R. 6517 on December 15, 2010. The Senate passed the bill with an amendment on December 22, 2010. The House agreed to the Senate amendment on December 22, 2010. The President signed the bill on December 29, 2010.
1932 An eligible individual is an individual who is (1) an eligible Trade Adjustment Assistance ("TAA") recipient, (2) an eligible alternative TAA recipient, or (3) an eligible Pension Benefit Guaranty Corporation ("PBGC") pension recipient.
1933 Qualifying family members are the taxpayer's spouse and any dependent of the taxpayer with respect to whom the taxpayer is entitled to claim a dependency exemption. Any individual who has other specified coverage is not a qualifying family member.
1934 Please see Part Two, Section III.B, above for a discussion of eligible coverage months and a more lengthy discussion of persons eligible for the health coverage tax credit and the definition of qualified health insurance under the Trade Act of 2002.
1935 Under section 7527, an individual is eligible for the advance payment of the credit once a qualified health insurance costs credit eligibility certificate is in effect.
1936 This ARRA provision generally applies to months beginning after December 31, 2009 (rather than February 17, 2009) and before January 1, 2011.
1937 The provision applies for certificates issued after August 17, 2009 and months beginning before January 1, 2011.
1938 ARRA also clarifies that the definition of an eligible TAA recipient includes an individual who would be eligible to receive a trade readjustment allowance except that the individual is in a break in training that exceeds the period specified in section 233(e) of the Trade Act of 1974, but is within the period for receiving the allowance.
1939 This ARRA provision generally applies to months beginning after December 31, 2008 (rather than February 17, 2009) and before January 2011.
1940 The Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") requires that a group health plan must offer continuation coverage to qualified beneficiaries in the case of a qualifying event. An excise tax under the Code applies on the failure of a group health plan to meet the requirement. Qualifying events include the death of the covered employee, termination of the covered employee's employment, divorce or legal separation of the covered employee, and certain bankruptcy proceedings of the employer. In the case of termination from employment, the coverage must be extended for a period of not less than 18 months. In certain other cases, coverage must be extended for a period of not less than 36 months. Under such period of continuation coverage, the plan may require payment of a premium by the beneficiary of up to 102 percent of the applicable premium for the period.
1941 This ARRA provision is effective for periods of coverage that would, without regard to the provision, end on or after February 17, 2010, provided that the provision does not extend any periods of coverage beyond December 31, 2010.
1942 The expansion of the definition of qualified health insurance to include coverage under an employee benefit plan funded by certain VEBAs is extended to apply to months beginning before February 13, 2012.
1944 Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(a); Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, sec. 1410; Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561, par. (1); Act to extend the Generalized System of Preferences and the Andean Trade Preference Act, and for other purposes, Pub. L. No. 111-124, sec. 4; Worker, Homeownership, and Business Assistance Act of 2009, Pub. L. No. 111-92, sec. 18; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, Pub. L. No. 111-42, sec. 202(b)(1).
1945 Small Business Jobs Act of 2010, Pub. L. No. 111-240, sec. 2131; Firearms Excise Tax Improvements Act of 2010, Pub. L. No. 111-237, sec. 4(a); United States Manufacturing Enhancement Act of 2010, Pub. L. No. 111-227, sec. 4002; Joint resolution approving the renewal of import restrictions contained in the Burmese Freedom and Democracy Act of 2003, and for other purposes, No. 111-210, sec. 3; Haiti Economic Lift Program of 2010, Pub. L. No. 111-171, sec. 12(b); Hiring Incentives To Restore Employment Act, Pub. L. No. 111-147, sec. 561, par. (2).
1946 Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, sec. 561, par. (3).
1947 All the public laws enacted in the 111th Congress affecting this provision are described in Part Twenty-One of this document.
1948 H.R. 847. The House passed H.R. 847 on September 29, 2010. The Senate passed the bill with an amendment on December 22, 2010. The House agreed to the Senate amendment on December 22, 2010. The President signed the bill on January 2, 2011.
1949 Secs. 864(c), 871(b), 873, 882(a), 882(c).
1953 Secs. 1441 and 1442 provide for withholding from payments to nonresident aliens and foreign corporations, respectively.
1954 U.S. Department of the Treasury, U.S. Model Income Tax Convention of November 15, 2006, available at http://www.treasury.gov/ offices/tax-policy/library/model006.pdf, updated an earlier model treaty published September 20, 1996. The Technical Explanation of the 1996 draft included a brief history of its provenance, explaining that it was drawn from a number of sources, including the U.S. Treasury Department's draft Model Income Tax Convention published on June 16, 1981, and withdrawn as an official U.S. Model on July 17, 1992, the Model Double Taxation Convention on Income and Capital, and its Commentaries, published by the OECD, as updated in 1995 (the "OECD Model"), existing U.S. income tax treaties, recent U.S. negotiating experience, current U.S. tax laws and policies and comments received from tax practitioners and other interested parties. U.S. Department of the Treasury, U.S. Model Income Tax Convention: Technical Explanation (September 20, 1996), available at 96 Tax Notes Today 186-7.
1956 H.R. 5901. The House passed H.R. 5901 on July 30, 2010. The Senate passed the bill with an amendment on December 17, 2010. The House agreed to the Senate amendment on December 22, 2010. The President signed the bill on January 4, 2011.
1968 For additional detail, see Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 109th Congress (JCS-1-00), January 17, 2007; see also Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 110th Congress (JCS-1-09), March 2009.
1981 For this purpose, payment by an assistance eligible individual includes payment by another individual paying on behalf of the individual, such as a parent or guardian, or an entity paying on behalf of the individual, such as a State agency or charity. Further, the amount of the premium used to calculate the reduced premium is the premium amount that the employee would be required to pay for COBRA continuation coverage absent this premium reduction (e.g. 102 percent of the "applicable premium" for such period).
END OF FOOTNOTES
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