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Thursday, July 30, 2009


If you are fortunate (unfortunate?) enough to qualify for the cash for clunkers program, the federal government will provide a $3,500 or $4,500 voucher toward the purchase or lease of a new, more fuel efficient vehicle when the purchaser or lessee surrenders an eligible trade-in to a participating dealer.

In a break to participants, the Florida Department of Revenue has advised car dealers that they should consider the voucher itself as a trade-in for purposes of Florida sales tax purposes. This means that the amount of the voucher will be taken off the sales price in computing sales tax due on the new vehicle purchase.

Tax Information Publication No. 09A01-11, July 16, 2009

Saturday, July 25, 2009


Many investors purchase gold, silver, and other precious metals through exchange traded funds (ETFs). Since shares in ETFs are usually traded through stock exchanges, the question has arisen whether any long term gains on sale of such ETF metal shares will be subject to the standard 15% maximum income tax rate long term capital gains, or the 28% "collectibles" maximum tax rate that would otherwise apply to direct gains in such metals.

The IRS has recently released a 2008 Chief Counsel Memorandum that confirms that as far as it is concerned, if the ETF is structured as a "trust" for income tax purposes and the fund purchases physical metal, then the gain will be collectibles gains, and thus long term gains will be subject to the 28% maximum rate.

Interestingly, in earlier private letter rulings (PLRs 200732026 & 200732027), the IRS adopted a somewhat contrary opinion when it ruled that the acquisition of shares of a publicly traded investment trust invested in gold or silver by either an IRA or an individually-directed account under a qualified retirement plan would not be considered the prohibited acquisition of a collectible under Code Section 408(m)(1).

Office of Chief Counsel Memorandum, CC:ITA:B01:LAAyres, May 2, 2008

Thursday, July 16, 2009


Many homeowners are suffering with damages to their residences from purportedly tainted Chinese drywall. The IRS has provided guidance on if and when damages may give rise to a casualty loss deduction under Code Section 163(h). The IRS Associate Chief Counsel indicates that such damages will meet the casualty loss requirements of being sudden, unexpected, or unusual, if the Environmental Protection Agency or the Consumer Safety Product Commission determines that such drywall emits chemical fumes that causes the extreme or unusual damages.

In computing such losses, taxpayers need to keep certain things in mind. First, casualty losses generally are subject to a $100-per-casualty floor and the 10%-of-AGI limitation. Second, the taxpayer will need to prove the amount of the loss, which is the loss in fair market value (but no greater than the taxpayer's adjusted basis in the residence).

In computing this loss of value, the taxpayer will need to separate out (and not deduct) loss in value relating to market declines in value. Since the U.S. residential market has undertaken a general decline in recent years, this separating of loss between drywall damage and market loss may be difficult to prove. Taxpayers may instead want to avail themselves of Treas.Reg. § 1.165-7(a)(2)(ii) which, if met, will allow the loss to be computed instead based on the cost of repairs.

The IRS also noted that costs incident to a casualty, such as temporary alternative housing, are nondeductible personal expenses and not casualty losses.

Taxpayers must also take the deduction in the proper year, which is generally the year the loss is sustained, or when a determination is made that the loss will not be fully reimbursed.

Saturday, July 11, 2009


Section 482 of the Internal Revenue Code requires arms-length pricing for transactions occurring between commonly controlled taxpayers. A principal objective of these rules is to assure that a fair amount of income and thus tax occurs within the U.S. taxing jurisdiction - that is, it seeks to prevent the shifting of income out of the U.S., or deductions into the U.S., through the use of overcharging or undercharging for items between related entities situated in different jurisdictions. To assure proper payments for use of intangible property, arms-length pricing generally requires that the pricing be commensurate with the income generated from the intangible.

Use of intangibles outside of the U.S. by non-U.S. entities can often allow the non-U.S. entity to generate income that is not immediately (or ever) subject to U.S. tax. If a U.S. entity develops the intangible, but then transfers it outside the U.S. to a related entity, Section 367 and/or 482 can operate to create income for the U.S. entity. To avoid this income, taxpayers often enter into joint development arrangements with related entities. Such "cost sharing" arrangements allow the U.S. and non-U.S. entities to jointly develop, own, and then use the developed intangibles. Since they jointly developed the intangible, there is no need to transfer ownership or license use of the intangible from one entity to the other, so the impact of Sections 482 and 367 can be minimized.

Prior regulations under Section 482 acknowledged cost sharing as a valid planning mechanism. However, the regulations did not provide a lot of detail on what cost sharing arrangements would be respected by the IRS.

In recently issued regulations, the IRS has now put a lot of "meat on the bones" of its prior regulations. The regulations are a two-edged sword. On the one hand, they provide a lot more guidance on how to put together a cost-sharing arrangement that the IRS will respect. On the other hand, taxpayers that do not follow the new rules risk having their cost-sharing arrangements challenged.

For those that are interested but haven't had a chance to review the regulations yet, below are some of the highlights.

GENERAL RULE. The IRS will respect a cost-sharing arrangement if (1) cost sharing transactions (CST) are entered into, (2) platform contributions are compensated for, and (3) various compliance requirements are met.

CST TRANSACTIONS. This obligation requires that commonly controlled taxpayers have to contribute to intangible development costs (IDCs) in proportion to their shares of reasonably anticipated benefits (RAB shares) from the developed intangibles by entering into cost sharing transactions (CSTs). In plain English, this means that the commonly controlled participants involved in developing an intangible, must each contribute via cash or property a pro rata share of the costs of development, in proportion to each of their anticipated benefits from the intangible asset. IDCs include all costs, including cash-based compensation, that are identified with or reasonably allocable to the development of the intangible asset. IDC's exclude land and depreciable property acquisition costs, and also exclude interest costs and income taxes. If a cost relates to the development of an intangible and also to other business activities, then it must be reasonably allocated between the two activities.

DIVISION OF BENEFITS. The future benefits from the intangible must be divided up among the commonly controlled participants in only certain ways. First, they can divide up the benefits via allocation of various nonoverlapping geographical divisions of use. Second, and this is new, the division can be made by allocating various "fields of use" among the participants. Third, and also new, the IRS will allow for other division methods established by taxpayers if they meet certain requirements such as clear and unambiguous division, that the method is verifiable, the benefit allocations are non-overlapping, perpetual, and exclusive, and the results are reasonably predictable.

COMPENSATION FOR PLATFORM CONTRIBUTIONS. As noted above, participants must contribute to the cost of IDC development in proportion to their anticipated benefits. However, sometimes participants will make noncash contributions to the development by contributing resources, capabilities, or rights that were acquired outside of the development of the subject IDC. For example, one of the controlled entities may provide its own research scientists or intellectual property to the IDC development process. The cost-sharing rules require that the contributors of such "platform contributions" receive arms-length payments for such platform contributions from the other participants. The arms-length payments are computed using traditional Section 482 arms-length computation methods and principles, with some special rules thrown in for good measure. Note that platform contribution payments must commence shortly after they are incurred.

ADMINISTRATIVE REQUIREMENTS. In addition to meeting the above substantive requirements, a qualified cost-sharing arrangement must (a) have a cost-sharing written contract, entered into within 60 days of the parties incurring their first intangible development cost, that provides various terms set out in the regulations, (b) meet additional documentary requirements, (c) meet specified accounting and books & records requirements, and (d) file required disclosures with the IRS, including one within 90 days of the first incurred IDC, and then annually. Note that the above 60 day requirement under (a) is a trap for the unwary. Taxpayers that start work on jointly developing an intangible, but don't enter into their agreement within the required 60 day period, risk having their cost-sharing arrangement not being respected by the IRS.

The IRS has done a good job in fleshing out the requirements for cost-sharing arrangements for taxpayers. This will provide more comfort and certainty for taxpayers engaging in these type of arrangements. At the same time, it has imposed various obligations, including proper payments for platform contributions and misc. administrative requirements that must be complied with, so the certainty that is provided comes with compliance costs, and risks for those that don't fully comply with the new rules.

Treas.Regs. Section 1.482-7T

Tuesday, July 07, 2009


On May 24 of this year, I discussed how some taxpayers suffered economic losses in a Section 1031 exchange when funds or property were held for them by Qualified Intermediaries that went bankrupt. In letters sent by the IRS to a Senator and a Congressman, the has IRS indicated that even though like-kind exchanges run through such Qualified Intermediaries could not be completed due to the bankruptcy of a Qualified Intermediary and not through any fault of the taxpayers, the taxpayers still need to recognize gain (if there is gain) if the property they contributed to the exchange was disposed of by the Qualified Intermediary.

The IRS noted that losses for lost funds and/or replacement property may be allowable under Section 165(a) in the year the loss is sustained. Thus, there may be an available offset for any gain that arises, depending on when the loss is evidenced by closed and completed transactions and fixed by identifiable events. However, if the loss occurs in a different tax year, a mismatch of gain and loss can occur.

The IRS did indicate, however, that it is "considering the tax policy implications of current law and evaluating the scope of [its] authority in this area to issue administrative guidance.” Therefore, it is possible that some direct relief may ultimately be issued by the IRS (presumably including the ability of the taxpayer to not have to recognize gain on the initial disposition, or at least measure gain and loss by the actual consideration received back).

Friday, July 03, 2009


In a recent Chief Counsel Advice (CCA), the IRS determined that it may enforce a levy by seizing and selling a taxpayer's executive stock options. That the options had restrictions on transferability was found not to impede seizure and sale.

In the CCA, the taxpayer owned vested nonqualified stock options (NQSOs) and qualified stock options (ISOs) in a corporation. Under the option terms, the taxpayer could only transfer the options only to certain named persons or under certain circumstances (e.g., death).

In regard to the NQSOs, the IRS noted that the transfer restrictions were contractual, not statutory. The IRS determined that the Code Section 6331 levy provisions superseded private contractual restrictions.

In regard to the ISOs, the restrictions on transfer were statutory, per Code Section 422. Nonetheless, the IRS concluded that Code Section 6334(c) trumps the ISO restrictions. That provision reads “not withstanding any other law of the United States ... no property or rights to property shall be exempt from levy other than property specifically made exempt by subsection (a).” Since there is no statutory exemption for stock options, the IRS determined it could levy on, seize, and sell the options.

This result is not unexpected. There are other areas of the law under which third party creditors cannot reach a property interest of a taxpayer, but the IRS can. Two of these are a taxpayer's interest in an ERISA-qualified retirement plan, and state law homestead protections.

While the CCA noted that there was a contractual agreement between the taxpayer and the company that opened the options up to the tax authorities, it went on to say that it was not relying on that contractual agreement in reaching its conclusion.

Chief Counsel Advice 200926001