FINAL REGS CLARIFY INSTALLMENT TAX PAYMENTS
The IRS issued final regulations governing the payment of tax liabilities in installments (TD 9473). The regulations reflect changes to the Tax Code made by acts going as far back as 1996.
IRC § 6159 allows taxpayers who cannot pay their tax liabilities in full to enter into an installment agreement with the IRS to pay off those liabilities over time. The IRS is authorized to base the installment payments on the amount taxpayers owe and their ability to pay that amount within the time the IRS can legally collect payment.
Various acts have affected taxpayer rights under such agreements. Under one such provision, taxpayers may request administrative review of IRS decisions to terminate installment agreements. Under others, taxpayers may appeal rejections of proposed installment agreements, and the IRS must accept proposed installment agreements in certain circumstances. Installment agreements can cover a taxpayer’s entire tax liability or only a portion of it. Partial payment installment agreements are reviewed by the IRS every two years to determine if the taxpayer’s financial situation has changed.
The final regulations reflect current IRS practice regarding installment agreements and adopt proposed regulations (with some clarifications) that were issued in 2007 (REG-100841-97). One clarification is that a taxpayer may submit a request to modify or terminate an installment agreement, but the request will not suspend the statute of limitations on collection, and the taxpayer must still comply with the existing installment agreement while the request is being considered. The regulations also clarify that the IRS can terminate an installment agreement if the taxpayer provides materially incomplete or inaccurate information to the IRS.
The final regulations were effective Nov. 25, 2009.
STOCK OPTIONS GET FINAL REGS
In final regulations (TD 9471), the IRS updated and clarified rules governing options granted under employee stock purchase plans (ESPPs) and certain information reporting requirements for ESPPs and incentive stock options (TD 9470). The amendments to regulations under IRC §§ 421 through 424 provide comprehensive rules with examples by which ESPPs may qualify for favorable tax treatment of stock options.
Generally, such treatment is available if a stock option granted under an ESPP is held at least two years from the date of the grant of the option or one year from its exercise, and the recipient remains an employee of the granting corporation (or its parent or subsidiary) continuously from the date of the grant to three months before the date of the exercise of the option.
TD 9471 adopts with several modifications proposed regulations issued in 2008 (REG-106251-08). In one such modification, the final regulations adopt an offering-by-offering approach to rules requiring identical rights and privileges for employees who are granted stock options and related requirements. The final regulations clarify that when more than one offering is made, the offerings may be consecutive or overlapping. Their terms need not be identical, as long as each offering and the plan together satisfy Treas. Reg. §§ 1.423-2(a)(2) and (3) as amended by the final regulations. The regulations address plan participation and approval, equal rights and privileges of employees granted options, and other matters.
Also, the IRS modified its interpretation of the $25,000 limit under IRC § 423(b)(8) on the annual increase in the amount of stock that may be purchased, to provide that the limit increases by that amount for each calendar year that an option is outstanding. The regulations also clarify certain issues of stockholder approval where ESPPs involve subsidiaries and parent corporations.
These final regulations apply to options granted on or after Jan. 1, 2010.
In addition, with TD 9470, the IRS issued final regulations amending Treas. Reg. § 1.6039-1 and adding new section 1.6039-2, both governing information returns and notices relating to ESPPs and incentive stock options. They modify proposed regulations (REG-103146-08) to provide that a transfer of legal title to a recognized broker or financial institution immediately following the exercise of an incentive stock option is treated as the first transfer of legal title for purposes of the filing requirement of IRC § 6039(a)(2).
These final regulations apply as of Jan. 1, 2007, with waiver of certain return requirements for stock transfers occurring during calendar years 2007 through 2009. The waiver does not extend, however, to requirements of furnishing information statements to employees, but taxpayers may rely on earlier final regulations in that regard for transfers in calendar years 2007 and 2008. For calendar 2009, they may rely on earlier final regulations, the proposed regulations or these new final regulations.
E-FILING MANDATED, REVENUE SHIFTED
Effective for returns filed after Dec. 31, 2010, any return preparer who files or expects to file more than 10 individual income tax returns in a calendar year must e-file those returns. The provision was included in the Worker, Homeownership, and Business Assistance Act of 2009 (PL 111-92), enacted in early November 2009. Along with its original purpose of extending unemployment benefits, the act also further expanded two taxpayer relief measures that had been expanded by the American Recovery and Reinvestment Act of 2009 (PL 111-5): the first-time homebuyer credit and increased net operating loss carryback (see “Tax Season Kicks Off,” JofA, Jan. 10, page 32).
Other measures in the Worker, Homeowner ship and Business Assistance Act that received less notice than the relief items include several affecting businesses: The act increased the penalty for failure to file partnership or S corporation returns (IRC §§ 6698 and 6699) from $89 to $195. It also extended the 0.2% FUTA surtax in IRC § 3301 through the first six months of 2011 (the surtax had been scheduled to expire at the end of 2009). In addition, it further increased the quarterly estimated tax payment large corporations will make during the third calendar quarter of 2014. The Corporate Estimated Tax Shift Act of 2009 (PL 111-42) provided that for corporations with assets of $1 billion or more, the estimated tax payment due in July, August or September of 2014 will be 100.25% of the amount otherwise due. The increase is only accelerated into that quarter; the quarterly estimated tax payment immediately following it is decreased by a corresponding amount. The Worker, Homeownership, and Business Assistance Act increased the shifted amount by 33 percentage points to 133.25% of the amount otherwise due.
REGS FINALIZED ON S CORP COD EXCLUSION
The IRS and Treasury Department issued final regulations (TD 9469) governing how an S corporation reduces its tax attributes under IRC § 108(b) when the S corporation has cancellation of debt (COD) income (also called discharge of indebtedness income) that is excluded from gross income under section 108(a).
The regulations address situations in which the aggregate amount of the shareholders’ disallowed section 1366(d) losses and deductions that are treated as a net operating loss (NOL) tax attribute of the S corporation exceeds its excluded COD income. The final regulations generally adopt the provisions of proposed regulations that were issued in 2008 (REG-102822-08).
Under section 108(b), taxpayers who are bankrupt or insolvent or whose discharged debt is qualified farm, real property business or principal residence indebtedness may exclude it from gross income. However, they must reduce certain tax attributes in the order given in section 108(b)(2), starting with any NOL and NOL carryover for the tax year of the discharge (unless they elect to first reduce their basis of depreciable property).
For an S corporation, these reductions are made at the corporate level after its items of income, loss, deduction and credit for the tax year of the discharge pass through to its shareholders under section 1366(a). Section 1366(d)(1) disallows any aggregate loss or deduction that exceeds a shareholder’s basis in debt and equity. For purposes of reducing tax attributes for COD income exclusion, however, any such disallowed amount is treated as an NOL of the S corporation (“deemed NOL”).
The final regulations provide an ordering approach for determining the character of the amount of the S corporation’s excess deemed NOL that is allocated to shareholders. It is generally consistent with the method for determining the character of a shareholder’s losses and deductions under section 1366(d): It is allocated to each shareholder in the proportionate amount of each item of the shareholder’s loss or deduction that is disallowed under section 1366(d)(1).
The proposed regulations provided that shareholders with disallowed losses and deductions under section 1366(d)(1) must report the amounts to the S corporation. The final regulations modify this requirement to allow the S corporation in certain situations to rely on its own books and records and other information where a shareholder fails to report or provides information that is incorrect or incomplete.
The final regulations apply to discharges of indebtedness occurring on or after Oct. 30, 2009.
UBS TARGETS COME INTO FOCUS
The IRS has released the selection criteria for identifying holders of accounts with Swiss bank UBS under a U.S. settlement agreement with the Swiss government negotiated in August. Under the agreement, UBS will turn over information concerning approximately 4,450 accounts for investigation. IRS Commissioner Doug Shulman also announced that about 14,700 taxpayers had come forward to disclose offshore assets under a reduced penalty program, nearly twice as many as Shulman had estimated on Oct. 15, when the program ended.
The settlement agreement represented a compromise between the two governments over a contested “John Doe” summons in U.S. v. UBS AG, a case filed in the U.S. District Court for the Southern District of Florida. Generally, the selection criteria cover U.S.-domiciled UBS clients who directly or beneficially owned undisclosed custody accounts or banking deposit accounts exceeding 1 million Swiss francs (currency converter at tinyurl.com/yaq79u9) at any time during 2001 through 2008 and about whom the U.S. government has a reasonable suspicion of tax fraud. Any U.S. persons (regardless of domicile) who beneficially owned offshore company accounts of any size during those years and whom the U.S. suspects of committing tax fraud will also be identified under the selection criteria.
Where a U.S.-domiciled account owner has submitted false documents or purposely masked his or her identity, the threshold account size for undisclosed custody accounts or banking deposit accounts will be reduced to 250,000 Swiss francs. Account holders who have engaged in acts of “continued and serious tax offense” (which include failure to provide a Form W-9 for at least three years) and whose account generated revenue of at least 100,000 Swiss francs per year will also be identified.
Despite the expiration in October of the IRS’ reduced penalty initiative for failure to disclose foreign accounts on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), Shulman urged taxpayers with offshore accounts to continue to come forward under ongoing voluntary disclosure rules that can reduce the likelihood of criminal prosecution. See “Voluntary Disclosure to the IRS: A Viable Option,” JofA, March 08, page 40, and articles at the JofA FBAR Resources page.
INFORMATION RETURN SSNs MAY BE SHORTENED
Under a pilot program announced by the IRS in November 2009 (Notice 2009-93) filers of certain paper information returns for tax years 2009 and 2010 may shorten the payee’s Social Security number on the payee statement to its final four digits. Printing the return copies with an abbreviated, or “truncated,” number is intended to deter identity theft.
Only paper payee statements for forms in the 1098, 1099 and 5498 series are eligible. The IRS has requested comments on whether the provision should be made mandatory, whether it should be expanded to other information returns, and whether it should be expanded to include electronically furnished statements. Comments are due May 1, 2010.