Line Items

The IRS issued proposed and temporary regulations under IRC §§ 6011 and 6302 (TD 9440) that no longer mandate annual filings by eligible employers in the reporting and paying of income taxes and Federal Insurance Contribution Act (FICA) taxes withheld from wages. The annual filings, using Form 944, Employer’s ANNUAL Federal Tax Return, are now optional for eligible employers. As originally issued in January 2006 (TD 9239, REG-148568-04), the rules required eligible employers to file annually rather than quarterly, using Form 941, Employer’s QUARTERLY Federal Tax Return.

Under Temp. Treas. Reg. §§ 31.6011(a)-1T(a)(5) and 31.6011(a)-4T(a)(4), which are in effect for tax years beginning on or after Jan. 1, 2009, employers that estimate that their annual employment tax liability will be $1,000 or less can contact the IRS to request permission to file Form 944 rather than Form 941. The eligibility threshold of $1,000 may be raised through future guidance.

The rules also create a safe harbor under IRC § 6302 for quarterly filers whose quarterly withholdings exceed $2,500. Previously, a quarterly filer avoided a penalty for failure to make timely monthly or semi-weekly deposits of employment taxes if the aggregate amount of employment taxes for the quarter was less than $2,500 and the amount was paid with a timely filed Form 941. The safe harbor under Temp. Treas. Reg. § 31.6302-1T(f)(4) exempts an employer from the penalty if the employment tax due was less than $2,500 in the current quarter or the prior quarter. The safe harbor is not effective until deposit periods beginning on or after Jan. 1, 2010.

Required minimum distributions (RMD) from retirement accounts were suspended for 2009, giving seniors a respite from a potential 50% excise tax. The Worker, Retiree and Employer Recovery Act of 2008, PL 110-458, waives the penalty for one year, giving retirees some time to recoup losses from the sharp stock market decline of 2008. Without the waiver, individuals age 70½ and older would be required to withdraw an amount, based on remaining life expectancy, from their traditional IRA, 401(k) or 403(b) accounts. Failure to withdraw the full RMD timely normally results in a 50% excise tax on the amount not withdrawn.

The Act also eases funding requirements for employer-sponsored pension plans and multiemployer plans. Without temporary relief, companies short on cash would be forced to make significantly increased contributions because of large declines in major world markets in the past year.

The Tax Court for a second time rejected an attempt by Merrill Lynch & Co. Inc., as the parent, to use a cross-chain sale by one subsidiary of a subsidiary to a sister corporation to increase its basis in the seller’s stock and facilitate a loss on the seller’s stock when it, in turn, was sold to an unrelated buyer.

In earlier litigation on the same matter, the Second Circuit Court of Appeals (94 AFTR2d 2004-6119) upheld the Tax Court’s decision that the IRS could reclassify the reported stock redemption under IRC § 304 as a sale under IRC § 302(b)(3), which deals with a complete termination of interest (see “Tax Matters: Firm-and-Fixed-Plan Rule Reaffirmed,” JofA, Feb. 05, page 75). The Second Circuit agreed that the “firm-and-fixed-plan” test applied because Merrill Lynch had a firm-and-fixed plan for its subsidiary, Merrill Lynch Capital Resources (MLCR), to lose control of the second-tier subsidiary. The sale, therefore, was a complete termination of interest under section 302(b)(2). The Second Circuit did, however, remand the case to the Tax Court to allow Merrill’s argument, raised for the first time on appeal, that the section 302(b)(3) test for a complete termination required consideration of the parent’s ownership interest in the issuing corporations.

In the most recent phase of litigation, Merrill argued it was entitled to dividend treatment because neither the cross-chain sales nor the later sale of MLCR reduced the 100% constructive ownership interest attributed to Merrill, as the parent, in the issuing corporations. The Tax Court disagreed (131 TC no. 19 (2008)). The court said that under section 304, MLCR was the only shareholder whose interest in the issuing corporations had to be tested pursuant to section 302. Because MLCR was completely terminated, the redemption was properly treated as a distribution in exchange for stock under section 302(a).

The government abandoned its appeal before the Eleventh Circuit of the decision last year by the District Court for the Northern District of Alabama in Regions Financial Corp. v. U.S. that quashed a workpapers summons. In so doing, the court let stand the district court’s holding (101 AFTR2d 2008-2179) that the papers were protected by the work product privilege. See also “Line Items: Work Product Stymies IRS Again,” JofA, August 08, page 88.

A New York state trial court dismissed’s challenge to a law that establishes sales tax nexus through in-state “associates” whose Web sites feature links to the online retailer. Amazon and another Web seller,, separately sued the state’s Department of Taxation and state officials last spring after New York extended its definition of “vendor” to include a seller who enters into agreements with instate parties to solicit business on behalf of the seller by means specifically including Internet links. The law requires such sellers, whether physically present in the state or not, to collect New York state taxes on sales to New York residents. (For previous coverage, see “Tax Matters: Online Retailers Battle N.Y. Nexus,” Oct. 08, page 96.)

The Supreme Court for New York County dismissed Amazon’s complaint Jan. 12. Amazon had argued that the law violates the U.S. Constitution’s Commerce Clause because it imposes tax collection obligations on out-of-state entities that have no substantial nexus with New York. The court, however, said the law passes constitutional muster because it requires a contract between a seller and a New York contractor, referrals by the contractor to the seller, payment of a commission to the contractor and a threshold of $10,000 annually in total sales to New York customers via the arrangement. An arrangement that meets those requirements, such as Amazon’s, reflects a “conscious decision” by the seller, and the seller thereby “avails itself of the benefit of in-state contractors compensated for referrals,” the court said.

As for whether the arrangement constitutes solicitation by the associates, as opposed to Amazon’s characterization of the relationship as merely one of advertising, the court said Amazon doesn’t discourage its associates from reaching out to customers “and pressing Amazon sales.” Consequently, the court said, it didn’t matter that Amazon doesn’t expect associates to actively solicit business, or even that associates’ contracts prohibit them from offering customer discounts for purchases made after customers “clicked through” to Amazon from their Web sites.

Where to find August’s flipbook issue

The Journal of Accountancy is now completely digital. 





Better decision-making with data analytics

Data analytics has become a hot topic, but many organizations have not yet managed to understand its potential, let alone put it to work. This report will take a deep-dive on how to best introduce or enhance the use of data in decision-making.