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News Notes

Lesli S. Laffie, J.D., LL.M.

From the IRS

The IRS released Notice 2006-47, which provides taxpayers with interim guidance on how to elect certain tax benefits established by the American Jobs Creation Act of 2004 (AJCA). The notice alerts taxpayers to the various elections now available and explains how to revoke certain elections currently in effect.

Prior guidance: The Service stressed that the notice does not cover every election or revocation created or affected by the AJCA. In particular, it does not address elections or revocations for which published guidance was issued prior to the notice, including provisions for the:

Repeal of the exclusion for extraterritorial income (Rev. Proc. 2001-37).
Treatment of family members as one shareholder for S corporation purposes
(Notice 2005-91).
Treatment of family members as one shareholder for S corporation purposes
(Notice 2005-91).
Election to use the per-ton rate in determining corporate tax on certain international shipping activities ( Notice 2005-2).
Repatriation of foreign dividends back to the U.S. at a reduced tax rate (Notice 2005-10).
Deduction of state and local general sales tax in lieu of state and local income taxes (Notice 2005-31).
Disallowance of certain partnership loss transfers ( Notice 2005-32).
Limits on transfer or importation of built-in losses ( Notice 2005-70).

Interim rules: The notice discussed elections for:

Allowing worldwide affiliated groups to allocate interest expense on a worldwide basis.
Modifying application of the income-forecast method of depreciation.
Permitting taxpayers that must translate foreign income payments to use the exchange rate in effect on the date they pay the taxes, provided the foreign taxes are denominated in a nonfunctional currency.
Allowing taxpayers to treat foreign taxes paid or accrued on amounts not constituting income for U.S. tax purposes under a new two-basket approach (general limitation income or financial services income).
Revoking a Sec. 631(c) election to treat timber cutting as a sale or exchange.
Permitting costs of less than $15 million for any qualified film or television production to be treated as deductible expenses.
Allowing taxpayers that realize gain from a qualifying electric transmission transaction to recognize all or part of it over eight years.
Permitting up to $10,000 of certain reforestation costs as deductible expenses.
Allowing a co-op to apportion the small ethanol producer credit on a pro-rata basis among its patrons.
Permitting a co-op to elect to apportion the low sulfur diesel fuel production credit among its patrons eligible to share in patronage dividends.
Allowing small business refiners to deduct certain costs associated with complying with the Environmental Protection Agencys sulfur regulations.
Allowing taxpayers to treat certain Alaska natural gas pipelines as being placed in service on Jan. 1, 2014 (and thus depreciable as seven-year property as of that date).

Legislation

TIPRA

On May 17, 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). Some of the provisions for individuals and small businesses are summarized below.

Capital gain and dividend rates: The TIPRA extends the reduced rates on capital gains and qualified dividend income through 2010.

Increased individual AMT exemption amounts: The alternative minimum tax (AMT) exemption increased for 2006 to $62,550 for married couples filing jointly and surviving spouses, and to $42,500 for unmarried individuals.

AMT relief for personal tax credits: Certain nonrefundable credits (including dependent care, elderly and disabled, Hope Scholarship and Lifetime Learning, and D.C. homebuyer) will be allowed to the full extent of an individuals regular tax and AMT for tax years beginning in 2006.

Increased age for kiddie tax: After 2005, children are subject to the kiddie tax provisions if they have not reached age 18 (up from 14) before the end of the tax year.

Elimination of income limits on Roth IRA conversions: For tax years beginning after 2009, taxpayers may make conversions of traditional IRAs to Roth IRAs without regard to their adjusted gross incomes. For conversions occurring in 2010 (unless the taxpayer elects otherwise), the amount includible in gross income as a result of the conversion is included ratably in 2011 and 2012; income inclusion is accelerated if converted amounts are distributed before 2012.

Sec. 179 expensing: The TIPRA extends through the end of 2009 the $100,000 expense amount, the phaseout limit (as adjusted for inflation) and the other Sec. 179 provisions that otherwise would have expired at the end of 2007.

Capital gain treatment for self-created musical works: At the taxpayers election, the sale or exchange of musical compositions or copyrights in musical works created by the taxpayers personal efforts may be treated as the sale or exchange of a capital asset, effective for sales or exchanges before 2011 in tax years after the TIPRAs enactment date.

Amortization of song rights: For any tax year after 2005 and before 2011, music publishers may amortize the advances they make to songwriters over five years. This amortization would be an alternative to the income-forecast method of accounting for these advances.

Partial payments with submissions of OICs: Taxpayers must make partial payments to the IRS while their offers-in-compromise (OICs) are being considered. For lump-sum offers, they must make a downpayment of 20% of the amount of the offer with any application; for periodic payment offers, taxpayers must comply with their own proposed payment schedule while the offer is being considered. At the same time, the user fee requirement is eliminated. Submitted offers that do not meet these requirements are unprocessable and may result in immediate enforcement. In addition, an offer is deemed accepted if the IRS does not make a decision on the offer within two years from the date it was submitted. This provision is effective for OICs submitted on or after 60 days after May 16, 2006.

Withholding on government payments: For certain nonwage payments made after 2010, withholding will be required. This provision applies to payments to any person providing property or services made by the U.S., and to every state and its political subdivisions and instrumentalities (including multistate agencies). The withholding requirement applies regardless of whether the government entity making the payment is the recipient of the property or services; some state subdivisions with annual expenditures for property or services below a specified dollar amount are exempt from this withholding requirement.

The rate of withholding is 3%, regardless of whether the payments are for property or services. In addition, there are information reporting requirements on payments subject to such withholding.

The provision does not apply to any payments made through Federal, state or local public assistance or public welfare programs under which eligibility is determined on a needs or income basis (e.g., food vouchers or medical assistance to low-income individuals). In addition, the provision does not apply to payments of wages or any other payment to which mandatory or voluntary withholding applies under current law (e.g., unemployment benefits). The proposal does not exclude payments potentially subject to backup withholding under Sec. 3406; however, if payments are actually being withheld under backup withholding, the provision does not apply. The provision also does not apply to certain specified payments, including payments of interest or payments for real property.