News Notes
IRS Updates Rules for Substantiating Travel Expenses • Service Changes Policy on Estate Tax Installment Payments • Changes to Form 5500 • Final Regs. Issued on Corporate Reorganizations
Alistair M. Nevius, J.D.
FROM THE IRS
IRS Updates Rules for Substantiating Travel Expenses
On September 27, 2007, the Service issued Rev. Proc. 2007-63, which updates the rules for substantiating an employee’s travel expenses using reimbursement arrangements, per diem allowances, or the high-low method.
The revenue procedure provides rules under which the amount of an employee’s ordinary and necessary business expenses for lodging, meals, and incidental expenses, or for meals and incidental expenses, incurred while traveling away from home is deemed substantiated under Regs. Sec. 1.274-5 when a payor (the employer, its agent, or a third party) provides a per diem allowance under a reimbursement or other expense allowance arrangement to pay for the expenses. The revenue procedure also provides an optional method for employees and self-employed individuals who are not reimbursed to compute the deductible costs paid or incurred for business meals and incidental expenses, or for incidental expenses only if no meal costs are paid or incurred, while traveling away from home.
Use of the methods described in the revenue procedure is not mandatory; taxpayers may use actual allowable expenses if they maintain adequate records or other sufficient evidence for proper substantiation.
Rev. Proc. 2007-63 does not provide rules under which the amount of an employee’s lodging expenses will be deemed substantiated when a payor provides an allowance to pay for lodging expenses only and not meal and incidental expenses.
Service Changes Policy on Estate Tax Installment Payments
In Notice 2007-90, the IRS announced a policy change, based on the Tax Court decision in Estate of Roski, 128 TC 113 (2007). The Service now will determine on a case-by-case basis whether security will be required when a qualifying estate elects under Sec. 6166 to pay all or a part of the estate tax in installments.
Sec. 6166 allows certain estates to elect to pay estate tax that is attributable to the decedent’s interest in a closely held business in up to 10 equal, annual installments, starting no later than the fifth anniversary of the due date of the estate tax liability.
The government’s interest in the deferred estate tax is secured by the general federal estate tax lien under Sec. 6324(a) for only the first nine years and three months of the installment payment period. Although this 10-year lien runs from the date of death, the installment payment period generally runs from the normal payment due date, nine months after the date of death, thus reducing the time the general lien protects the government to nine years and three months. Since installment payments generally do not have to start until five years and nine months after the date of death, the payment period can extend well past the time when the lien secures the government’s interest. According to the Service, in most cases, approximately half of the total deferred estate tax still remains to be paid during that final, unsecured portion of the deferral period.
As a result, the Service had been requiring either a surety bond or a special lien under Sec. 6324A as a prerequisite to allowing estates to elect to pay in installments. However, in April 2007, the Tax Court, in Estate of Roski, held that the IRS had abused its discretion by requiring this of all estates electing installment payments instead of making the determination case by case. The IRS says it is in the process of establishing standards to be applied on a case-by-case basis in the future to identify when the government’s interest in the deferred estate tax is deemed to be sufficiently at risk to justify the requirement of a bond or special lien. Treasury intends to issue regulations implementing those standards.
Until the standards are determined and the regulations are issued, the Service will determine case by case whether it will require a surety bond or special lien. If an estate refuses to provide the bond or lien when the Service determines one is necessary, the IRS can terminate the installment payment election.
The IRS, the Department of Labor (DOL), and the Pension Benefit Guaranty Corporation have jointly released the 2007 Form 5500, Annual Return/Report of Employee Benefit Plan, and its related instructions. Some significant changes have been made to Form 5500 for plan year 2007.
A new simplified reporting option (required by the Pension Protection Act of 2006, P.L. 109-280) has been introduced for eligible plans with fewer than 25 participants. The simplified return/report consists of Form 5500; Schedules A, Insurance Information, B, Actuarial Information, I, Financial Information—Small Plan, and SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits; and the identifying information and Part II of Schedule R, Retirement Plan Information.
The Schedule B instructions have been revised to reflect the updated mortality tables in Regs. Sec. 1.412(l)(7)-1 and the list of codes used for valuation purposes. The mortality tables are used under Sec. 412(l)(7)(C)(ii) to determine current liability for participants and beneficiaries (other than disabled participants) for plan years beginning after January 1, 2007.
Because separate actuarial information schedules were developed for 2008 plan year filings, plans will no longer file Schedule B with their 2008 Form 5500. Filers required to file a Schedule B cannot use the 2007 forms to satisfy their 2008 filing requirements. Short plan year filers who must file a Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information, or Schedule MB, Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information, and/or a supplemental attachment to Schedule R for 2008 will receive an automatic extension to file their complete Form 5500 until 90 days after the 2008 forms are available.
Information copies of the forms, schedules, and instructions are available online at www.efast.dol.gov/. Filers should monitor the EFAST website for information on approved software vendors for completing the 2007 forms and on the availability of the official government-printed forms. Advance copies of the 2007 Form 5500 cannot be used for 2006 plan year filings. For general assistance, contact the EFAST help line at (866) 463-3278.
Regulations
Final Regs. Issued on Corporate Reorganizations
The IRS has issued final regulations (TD 9361), effective October 25, 2007, that provide guidance regarding the effect of certain transfers of assets or stock on the continuing qualification of transactions as reorganizations under Sec. 368(a). The regulations also provide guidance on the continuity-of-business-enterprise requirement and the definitions of “qualified group” and “party to a reorganization.”
Sec. 368 affords various types of reorganizations tax-free treatment. The theory underlying this treatment is that such transactions “effect only a readjustment of continuing interest in property under modified corporate forms” (Regs. Sec. 1.368-1(b)). This principle is expressed in the continuity-of-interest and continuity-of-business-enterprise requirements.
Sec. 368(a)(2)(C) allows tax-free reorganizations in which part or all of the acquired assets or stock is transferred to a corporation controlled (as defined in Sec. 368(c)) by the acquiring corporation. Regs. Sec. 1.368-2(k), as in effect prior to these final regulations, expanded the scope of Sec. 368(a)(2)(C) by permitting successive transfers of the acquired assets or stock to one or more corporations, provided that the transferee corporation was controlled in each transfer by the transferor corporation. Administratively, the Service has since interpreted Sec. 368(a)(2)(C) and Regs. Sec. 1.368-2(k) as permissive rather than exclusive or restrictive, concluding that certain transfers not specifically described in either of those provisions did not disqualify the reorganization. (See, e.g., Rev. Ruls. 2001-24 and 2002-85.)
The new regulations do not contain separate rules addressing remote continuity because the Service believes these issues are adequately addressed by the rules adopted to implement the continuity-of-business-enterprise requirement (see TD 8760). Similarly, the rules relating to the continuity-of-business-enterprise requirement have been broadened over the years to permit transactions that adequately preserve the link between the former target corporation’s shareholders and the target’s business assets. Under Regs. Sec. 1.368-1(d), as in effect prior to these final regulations, the continuity-of-business-enterprise requirement generally is satisfied as long as a member of the qualified group (or, in certain cases, a partnership) either continues the target’s historic business or uses a significant portion of the target’s historic business assets in a business.
A qualified group was defined in Regs. Sec. 1.368-1(d)(4)(ii), as in effect prior to these final regulations, as one or more chains of corporations connected through stock ownership with the issuing corporation, but only if the issuing corporation directly owns stock meeting the requirements of Sec. 368(c) in at least one of the corporations, and stock meeting the requirements of Sec. 368(c) in each of the corporations (other than the issuing corporation) is owned directly by one of the other corporations.
These final regulations continue the trend of broadening the rules on transfers of assets or stock following an otherwise tax-free reorganization where the transaction adequately preserves the link between the former target corporation’s shareholders and the target’s business assets. Accordingly, the definition of a qualified group in Regs. Sec. 1.368-1(d)(4)(ii) and the rules regarding stock or asset transfers in Regs. Sec. 1.368-2(k) have been expanded. Conforming changes to Regs. Sec. 1.368-2(f), relating to the definition of “a party to a reorganization,” also have been made.
Revised Regs. Sec. 1.368-1(d)(4)(ii) permits qualified group members to aggregate their direct stock ownership of a corporation in determining whether they own the requisite Sec. 368(c) control in the corporation, provided that the issuing corporation directly owns stock meeting the control requirement in at least one other corporation. (This aggregation concept is similar to the affiliated group concept found in Sec. 1504(a).)
The final regulations also provide that a transaction otherwise qualifying as a reorganization will not be disqualified or recharacterized as a result of one or more transfers (that do not constitute distributions) of assets or stock, or both, of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, provided the continuity-of-business-enterprise requirement is satisfied, and the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, does not terminate its corporate existence in connection with the transfer(s). In the case of stock transfers of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, the final regulations only protect the transaction from disqualification or recharacterization if the transfers do not cause the corporation to cease to be a member of the qualified group.
The final regulations permit both distributions of stock of the acquired corporation and other transfers of stock of the acquired corporation, the acquiring corporation, or the surviving corporation, as the case may be, provided the transfer of stock does not cause the transferred corporation to cease to be a member of the qualified group. The regulations have been expanded to provide that if members of the qualified group own interests in a partnership that meet requirements equivalent to the control definition in Sec. 368(c), any stock owned by the partnership is attributed to and treated as owned by members of the qualified group. Accordingly, this full stock attribution rule treats partnerships in a manner similar to members of the qualified group.
