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NewsNotes Lesli S. Laffie, J.D., LL.M. Partnership Tax Deficiency Disabled Access Credit Intangibles Capitalization
Court Decisions In Galletti, 3/23/04, the Supreme Court unanimously ruled that the IRS need not separately assess partnership taxes against each of the partners individually to trigger the extended statute of limitations (SOL) for initiating a collection action against the partners to enforce derivative liability for tax debts. The Court overruled the Ninth Circuit, which had held the assessment against the partnership did not operate against the individual partners. Writing for the Court, Justice Clarence Thomas said that the governments timely assessment of taxes against a partnership is sufficient to extend the statute of limitations to collect the tax in a judicial proceeding, whether from the partnership itself or from those liable for its debts. At issue was the proper interpretation of Sec. 6502, which states that if a tax is properly assessed within three years of filing the return, the SOL for tax collection extends to 10 years from the assessment date. Abel and Sarah Galletti and Francesco and Angela Briguglio were general partners of Marina Cabrillo Partners. From 19921995, the partnership failed to pay Federal employment taxes, prompting the IRS to assess the partnership in 1994, 1995 and 1996. In October 1999, the Gallettis filed a joint petition for Chapter 13 relief; the Briguglios filed such a joint petition in February 2000. The IRS filed proofs of claim against all the debtors for the unpaid taxes it had assessed against the partnership. Lower court rulings: The debtors objected to the claims on the grounds the IRS had assessed only the partnership, not the individual partners, and that the SOL had run. The IRS conceded it had not assessed the debtors individually within the usual three-year limit, but argued that its timely assessments against the partnership extended the time for collecting from the debtors. The bankruptcy court sustained the debtors objections. The district court affirmed, as did the Ninth Circuit. According to the latter court, the partnership assessment was not an assessment against the individual partners (debtors), because they were separate taxpayers; thus, the assessment extended the SOL (to 10 years from the assessment date) only for the partnership, but had no effect on the ordinary three-year SOL for the debtors. The Ninth Circuit also held that California partnership law did not aid the IRS, because under state law a creditor cannot collect a partnership debt from an individual partner without first obtaining a judgment against the partner. Supreme Courts decision: Justice Thomas wrote that the debtors claim that they had to be separately assessed turned on a mistaken understanding of the function and nature of an assessment; it is not identical to the initiation of a formal collection action against any person or entity who might be liable for payment of a debt. According to Thomas, the term assessment refers to little more than the calculation or recording of a tax liability; thus, the tax is assessed, not the taxpayer. Once a tax has been properly assessed, nothing in the Code requires the IRS to separately assess the same tax against individuals or entities who are not the actual taxpayers but are, by reason of state law, liable for payment of the taxpayers debt. The consequences of the assessment (the extension of the SOL for debt collection) attach to the tax debt without reference to the special circumstances of the secondarily liable parties.
From the IRS According to Chief Counsel Advice (CCA) 200411042, software expenses to improve access to a business website are ineligible for the Sec. 44(a) disabled access credit, because they do not meet a physical presence requirement. Further, annual software subscription costs are not eligible. Law: Sec. 44(a) allows an eligible small business to claim a disabled access credit of 50% of the eligible access expenditures for the tax year that exceed $250 but not $10,250; thus, the maximum credit for any year is $5,000 (50% ($10,250 $250)). For this purpose, an eligible small business is any person (1) with gross receipts for the preceding tax year that did not exceed $1 million or (2) that did not have more than 30 full-time employees during the preceding tax year. Eligible access expenditures are amounts paid or incurred by a small business to comply with the applicable Americans with Disabilities Act of 1990 (ADA) requirements; see Sec. 44(c)(1). Under Sec. 44(c)(2), some of these expenditures include amounts to provide:
Facts: In the CCA, developers created software that allows certain disabled individuals (e.g., hearing and speech impaired or visually impaired) to improve communication with a business. Several businesses that bought the software conducted business only via the Web. The developers claimed that using their software program made each businesss website more accessible to disabled individuals and that the businesses would qualify for the disabled access credit. Some businesses paid the developers annual subscription costs for the software product and, thus, claimed the disabled access credit for multiple years. Ruling: The CCA concluded that the software expenses the businesses incurred were not eligible access expenditures available for the disabled access credit. The ADA prohibits discrimination against those disabled in a place of public accommodation; see 42 USC Section 12182(b)(1). The CCA concluded that the majority of cases interpreting the ADA limit the term place of public accommodation to an actual physical structure. The CCA noted, a nexus between the challenged service and the premises of a physical public accommodation is required. Thus, improved access to a website does not qualify. The holding presents a problem for small businesses that do business solely over the Web. The CCA also stated that businesses claiming disabled access credits in multiple tax years for annual subscription costs were attempting to circumvent the Sec. 44(c)(1) limit that prevents a taxpayer already in compliance with the ADA from claiming the credit in a subsequent year for expenses to upgrade, improve or continue disabled access services. At the end of each year, the subscription termination would cause the businesses to fall out of compliance with the ADA and each business would purchase another annual subscription, thereby generating another $5,000 disabled access credit. The repeat expenditures were ineligible for the credit, because they were unreasonable and unnecessary to accomplish Sec. 44(c)(2) purposes.
Rev. Proc. 2004-23 sets forth exclusive administrative procedures for taxpayers to obtain automatic consent to change to an accounting method under recently issued final regulations (TD 9107) on capitalizing costs incurred in acquiring or creating intangibles.
The procedures
generally are consistent with the existing procedures The procedures are available for a taxpayers first tax year ending after Dec. 30, 2003. The IRS intends to issue future guidance for accounting-method changes made for subsequent tax years, including automatic consent procedures for some or all of the methods provided in the final regulations. |
