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The IRS extended until June 1 the comment period for its proposal to require large businesses to disclose uncertain tax positions and announced that it intends to make the requirement effective for tax years beginning in 2010.


The IRS said in Announcement 2010-17 in early March that, in response to requests from a number of groups, including the AICPA, for more time to study the proposal, the IRS extended the comment period. When the Service unveiled the proposal Jan. 26 in Announcement 2010-9, the IRS had set March 29 as the comment cutoff date.


The IRS anticipates that a draft new schedule and instructions it planned to release in April would answer many of the questions it has received about the proposal. The proposal would require businesses with more than $10 million in assets to disclose with their tax returns certain details about each uncertain tax position, defined as a position for which the taxpayer or a related entity has recorded a reserve in its financial statements under FASB Interpretation no. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, or other accounting standards. (The provisions of FIN 48 are now codified in FASB ASC Topic 740.) Reportable uncertain tax positions would also include those for which taxpayers have not established a reserve because they expect to litigate the position or have determined the IRS has a general practice not to examine the position. Affected taxpayers would also be required to disclose the maximum amount of potential federal tax liability attributable to each uncertain tax position (determined without regard to the taxpayer’s risk analysis regarding its likelihood of prevailing on the merits).


The Service invited comment on particular issues concerning the proposal:

  1. Will the new schedule and its disclosures duplicate existing forms such as Form 8275, Disclosure Statement, and 8275-R, Regulation Disclosure Statement, and their disclosures?
  2. What types of uncertain tax positions should be reported by pass-through and tax-exempt entities?
  3. How should uncertain tax positions be reported by related entities such as members of a consolidated group for financial statement or tax return purposes or entities that are disregarded for federal tax purposes?

Comments can be e-mailed to Announcement.Comments@irscounsel, with “Announcement 2010-9” in the subject line.


See “AICPA Positions on Recent IRS Proposals” on page 30 for the AICPA’s position on the IRS proposal.




The IRS suspended any requirement for persons other than U.S. citizens and domestic entities to file a Form TD F 90- 22.1, Report of Foreign Bank and Financial Accounts (FBAR), otherwise due on June 30, 2010. The Service also extended until June 30, 2011, the deadline for filing an FBAR that would otherwise be due for 2010 and earlier calendar years for persons who only have signature authority over, but no financial interest in, a foreign financial account and those holding foreign commingled funds. Also, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued proposed regulations clarifying these and other issues.


In Announcement 2010-16, the IRS temporarily suspended the FBAR filing requirement for persons who are not U.S. citizens or residents or domestic corporations, partnerships, trusts or estates. Such persons had not been required to file an FBAR under instructions for a July 2000 version of the form. However, instructions with an October 2008 revision of the form added to the definition of a U.S. person required to file those “in and doing business in the United States.” In response to “numerous questions and comments” about the revised definition, the IRS in Announcement 2009-51 said persons could rely on the earlier definition for FBARs due on June 30, 2009. On Feb. 26, the IRS extended that relief to FBARs due June 30, 2010, and substituted the earlier definition of U.S. person with respect to FBARs for calendar 2009 and earlier calendar years.


In Notice 2010-23 the IRS provided administrative relief from FBAR filing responsibility for persons with only signature authority over, but no financial interest in, a foreign financial account and those with signature authority over or a financial interest in foreign commingled funds. The 2008 revised form instructed persons holding only signature authority to file even if the owner of the account reported it separately on an FBAR. They also defined foreign accounts as including those “in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund (including mutual funds).”


For both signing authority only and commingled funds, the IRS in Notice 2009-62 provided an extended filing date of June 30, 2010, for FBARs due in 2009 and earlier calendar years. The latest notice extends the FBAR filing deadline in those situations until June 30, 2011, for 2010 and earlier years.


FinCEN’s proposed regulations (RIN 1506-AB08, amending 31 CFR Part 103) would define a U.S. person required to file an FBAR as a U.S. citizen or resident or domestic entity, using the definition of “U.S. resident” found at IRC § 7701(b), except that the definition of “United States” is that of 31 CFR § 103.11(nn): the states, District of Columbia, Indian lands (as defined in the Indian Gaming Regulatory Act), and U.S. territories and insular possessions.


The FinCEN proposed regulations would define “financial interest” and “signature authority.” A person having a financial interest in a foreign financial account under the proposed regulations includes (1) a U.S. person who is the owner of record of or who holds legal title to the foreign financial account and (2) a U.S. person on whose behalf the owner of record or holder of legal title to the foreign financial account is acting with respect to the account. It also includes a person who has a more-than-50% stock interest in a corporation, a profits or capital interest in a partnership, or a beneficial interest in the assets or current income of a trust that is an owner of record of or holds legal title to a foreign financial account. “Signature authority” would mean authority of an individual (alone or in conjunction with another) to control the disposition of funds or assets held in an account.


The proposed regulations would continue the reporting requirement for U.S. persons with signature or other authority over foreign financial accounts. However, they would exempt from reporting certain officers and employees of financial institutions that have a federal functional regulator, and certain entities that are publicly traded on a U.S. national securities exchange or that are otherwise required to register their equity securities with the SEC, where these officers or employees have signature or other authority over a reportable account but have no financial interest in the account.




In a private letter ruling (PLR 200953005) the Service said a taxpayer could exclude income arising from cancellation of indebtedness under the exception for qualified real property business indebtedness (QRPBI) of IRC § 108, even though the taxpayer’s security interest and ownership of real property were both indirect.


The taxpayer and all relevant entities were LLCs. The taxpayer formed a subsidiary, and together they held all the interests of another subsidiary (designated “Borrower LLC” in the ruling), which in turn was the sole member of the LLC holding title to office and retail commercial rental property (“Owner LLC”). Owner LLC had borrowed funds secured by a mortgage from third-party lenders to purchase the property. A year later, to renovate the property and convert part of it into residential rental units—but also to pay cash distributions to the owners—the taxpayer and subsidiaries refinanced the original debt. They did so via a senior refinance loan and a subordinate unsecured loan, both to Owner LLC, and a “mezzanine loan” to Borrower LLC. The mezzanine debt was secured by a perfected, first-priority interest in all the ownership interests in Owner LLC and in two new LLCs: a managing member of a master-lessee and a subtenant. Upon default on the mezzanine debt, the lender could “step into the shoes of the borrower.” The taxpayer sought to refinance the mezzanine debt, which it anticipated would result in discharge of a portion of it.


QRPBI for purposes of the exception is defined in section 108(c)(3) as debt that is “incurred or assumed by the taxpayer in connection with real property used in a trade or business and is secured by such real property.” The IRS noted that although “secured by such real property” is not defined in the statute, in other contexts the Service has interpreted the phrase to include not only mortgages as security interests but also ownership interests in a partnership or disregarded entity holding the property. In economic terms, the mezzanine debt was secured by real property because the only assets held by the Owner LLC were the property and related personal property, and by “stepping into the shoes” of the Owner LLC upon a default, the creditor would acquire full control of and an equity interest in the property. Because the taxpayer owned the property through a series of disregarded entities, the taxpayer could also be considered for federal income tax purposes as owner of the property and incurring the debt, the IRS said.


The IRS also applied section 108(c)(4), which further requires that the QRPBI be “incurred or assumed to acquire, construct, reconstruct, or substantially improve such property.” This requirement appeared to have been met with respect to at least a portion of the contemplated proceeds from refinancing. However, the taxpayer had also stated that a portion of the proceeds were for making distributions to owners, and that portion would not constitute QRPBI.




The IRS clarified in Notice 2010-19 that gift tax provisions continue to apply to transfers in trust made in 2010 under IRC § 2511(c), even where the trust is treated as wholly owned by the donor or the donor’s spouse under the grantor trust rules of sections 671 through 679. Some taxpayers may have incorrectly interpreted the provision as excluding such transfers from gift tax, the IRS said. Rather, it is meant to include as subject to gift tax certain transfers to trusts that before 2010 would have been considered incomplete and therefore not subject to it, the IRS said.


Gift tax generally applies to both direct and indirect transfers (IRC § 2511(a)). Under section 2511(c), a transfer in trust is treated as a gift “unless the trust is treated as wholly owned by the donor or the donor’s spouse.” Section 2511(c) is effective for transfers after Dec. 31, 2009, and before Jan. 1, 2011.




The Eighth Circuit Court of Appeals affirmed (docket no. 09-1381, 2/9/2010) the holding of the Tax Court (131 TC 29) that pet food company Nestle Purina Petcare Co. could not deduct “cash distribution redemptive dividends” paid by an employee stock ownership plan (ESOP) of its predecessor company, Ralston Purina Petcare. Thus the Eighth Circuit underscored its similar holding in General Mills Inc. v. U.S. (554 F.3d 727 (2009)) and the Third Circuit’s holding in Conopco (docket no. 07-3564 (2009)). (For previous Tax Matters coverage, see “ESOP Redemptions Not Deductible as Dividends,” Oct. 09, page 70, and “Deduction Denied for ESOP Stock Redemption,” May 09, page 65.) In all three cases, the courts held that IRC § 162(k)(1) (no deduction allowed for amounts paid by a corporation to reacquire its stock) trumps section 404(k)(1) (deduction allowed for cash dividends paid by a corporation with respect to employer securities held by an ESOP). Consequently, redemptions of the employers’ stock to fund cash benefits from the ESOPs were held not to be deductible even if they were called dividends.



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