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NewsNotes Lesli S. Laffie, J.D., LL.M. Corporate Tax Shelters * QSub Election * Standard Mileage Rates * Undeliverable Refunds * FSC Legislation
From the IRS Notice 2000-60 addresses stock compensation corporate tax shelters. These artificial loss transactions are based on Sec. 83(h), which concerns property transferred in connection with services, and basis rules that apply to corporations and their subsidiaries. The transactions involve several steps to artificially reduce the value of a subsidiary to a parent; the subsidiary is then liquidated, with both the parent and the subsidiary claiming a loss. Under the arrangement, a parent uses a less-than-80%-owned subsidiary that has little or no active business. The parent transfers cash to the subsidiary and reflects the amount transferred in its subsidiary stock basis. The subsidiary uses the cash to buy the parent's stock from the parent's stockholders. The subsidiary subsequently transfers the parent's stock to the parent's employees in satisfaction of the parent's stock-based employee compensation obligations. The parent and subsidiary take the position that the stock transferred to the parent's employees is a deemed capital contribution by the subsidiary to the parent. The parent does not reduce its basis in the subsidiary's stock as a result of the deemed transfers. The subsidiary increases its basis in its remaining parent stock by the basis in the parent's shares that it transferred in the deemed capital contributions to the parent. Further, the parent reports no gain or loss from the deemed transfers of its stock to its employees and claims a deduction in the amount that its employees include in income from their receipt of the parent's stock. The subsidiary liquidates or the parent sells the subsidiary's stock and claims a capital loss. The subsidiary also claims a capital loss on the sale of its remaining stock in the parent immediately before its liquidation or sale. Treasury believes the basis transfers in the transaction are incorrect; by claiming the deduction and the loss on the subsidiary, the same amount is used twice. Treasury is recharacterizing the basis transfer from the subsidiary to the parent as a dividend to the parent; the dividend should decrease the parent's basis in the subsidiary.
The Small Business Job Protection Act of 1996 amended Sec. 1361 to permit an S corporation to (1) own 80% or more of a C corporation's stock and (2) elect to treat a wholly owned subsidiary as a qualified subchapter S subsidiary (QSub). In Notice 97-4, the Service prescribed temporary election procedures for S corporations to elect QSub treatment for a subsidiary. Those procedures included use of Form 966, Corporate Dissolution or Liquidation, to make a QSub election. Effective Jan. 20, 2000, final regulations (TD 8869) were published on QSubs and other S subsidiaries. They provided that QSub elections are to be made by filing the form to be provided for that purpose. In the preamble, taxpayers were instructed to continue following Notice 97-4 until a new QSub election form was available. Notice 2000-58 now supersedes Notice 97-4. A new QSub election form, Form 8869, Qualified Subchapter S Subsidiary Election, should be used by all S corporations seeking to elect QSub treatment for wholly owned corporate subsidiaries.
According to Rev. Proc. 2000-48, the 2001 standard mileage rates for the use of a car are as follows:
In 2000, the IRS received 128 million individual tax returns and issued 91 million refunds. However, according to IR-2000-78, as of mid-November 2000, the IRS was looking for more than 90,000 taxpayers who had not received tax refund checks worth $67.4 million. An annual review showed 91,823 Federal tax refunds were returned to the IRS, a drop from 102,840 the previous year. The new tally included tax refunds from 1999 and prior tax years. The total amount of returned refunds fell $4.6 million from a year ago, when they totaled $72 million. The average per-check amount was $734, compared to $700 last year. Refunds can be checked at (800) 829-1040. The biggest number of undeliverable refunds stems from California (14,648), New York (8,519), Florida (8,208) and Texas (8,046). The average undelivered refund amount in Florida is $1,017, the highest in the nation and well above the national average. Minnesota, with an average of $997, is a close second, followed by New York with $940, Nevada with $868 and Illinois with $808. There are many reasons why refund checks might not reach taxpayers. Most frequently, people move and the tax refunds are returned to the IRS. For example, college students might file a return while at school and move before the refund arrives. Other undelivered refunds can occur because taxpayers provide an incorrect address when they mail their return. Taxpayers should take extra care when providing a return address. Often, numbers are transposed or information is incomplete. A death or marriage may also result in a returned check. Executors should explore whether a refund check might be involved. Newly married taxpayers are urged to notify the IRS promptly if there is a name or address change. The IRS will keep the information on file and forward the full amount to the taxpayer as soon as a valid address is known. For many taxpayers owed refunds, the money will be forwarded automatically the next time a tax return is filed; there is no statute of limitations for claiming these refunds. Choosing to have a tax refund deposited directly to a bank account is the best way to guard against loss or theft. Nearly 30 million taxpayers elected to use the direct deposit option during the 2000 filing season, up from 23.5 million one year ago. Filing a change-of-address card with the post office will not guarantee delivery of a refund check. Taxpayers who have moved since filing their last tax return are urged to file Form 8822, Change of Address, with the IRS. The form can be obtained by calling (800) 829-3676 or downloading it from the IRS Website, at http://www.irs.gov .
Legislation On Nov. 15, 2000, President Clinton signed into law the "FSC Repeal and Extraterritorial Income Exclusion Act of 2000" (HR 4986). The new law repeals Code provisions relating to foreign sales corporations (FSCs) and replaces the FSC regime with an extraterritorial income exclusion designed to more closely model European tax structures. The President noted that it was the first time the U.S. had to enact "legislation in the sensitive field of taxation policy, in order to implement the findings of a dispute settlement panel of the World Trade Organization (WTO)...this legislation specifically addresses the concerns raised by the WTO Appellate Body and will be found to be WTO-compliant." Congress passed the repeal legislation in response to a finding by the WTO that the FSC provisions of U.S. tax law violated the WTO Agreement on Subsidies and Countervailing Measures and the Agreement on Agriculture. The European Union (EU) is likely to seek a further ruling from the WTO that the new structure also constitutes an impermissible trade subsidy. The U.S. plans to continue working with the EU to resolve any concerns about the new law, the President stated. |
