Insights & News

Tax Insights, February 3, 2016
Tracking Tax News You Need to Know

February 03, 2016

IRS Updates Accuracy-Related Penalty Guidance
The IRS released Rev. Proc. 2016-13; 2016-4 IRB 290, updating Rev. Proc. 2015-16, 2015-7 I.R.B. 596, which identified circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or position is adequate for the purpose of reducing the accuracy-related penalty under Section 6662(d) (section references are to the Internal Revenue Code of 1986, as amended), and the preparer penalty under Section 6694(a). Specifically, for tax years ending Dec. 31, 2014, or later,

  • filers that (a) are required to file Schedule M-3 (Form 1120), Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More, and have less than $50 million in total assets at the end of the tax year or (b) are not required to file Schedule M-3 and voluntarily file Schedule M-3, are not required to file Schedule B (Form 1120), Additional Information for Schedule M-3 Filers; and
  • partnerships that (a) are required to file Schedule M-3 (Form 1065), Net Income (Loss) Reconciliation for Certain Partnerships, and have less than $50 million in total assets at the end of the tax year or (b) are not required to file Schedule M-3 and voluntarily file Schedule M-3, are not required to file Schedule C (Form 1065), Additional Information for Schedule M-3 Filers.

IRS Finds It Has Authority to Adjust COD Income Deferred Under Section 108(i)
In a legal memorandum, the IRS found that although Section 6501 generally limits the period during which tax may be assessed to three years after the date the taxpayer files a return, Section 6501 merely prevents assessment and collection of tax beyond the prescribed period of limitations and does not prevent an adjustment that may affect other taxable years or other tax liabilities, or does not result in the assessment of a tax. Further, since the IRS has successfully recomputed a taxpayer's income for a closed year in determining the deficiency for an open year (the “adjustment theory”), the IRS may, under a given set of facts, apply the adjustment theory to adjust the amount of cancellation of debt income that a taxpayer has elected to defer under Section 108(i), even if the taxable year of the election is closed under Section 6501.

IRS Applies Proration Rules to Life Insurance Company
In Chief Counsel Advice 201603023, where a taxpayer, a life insurance company, issued variable annuity contracts supported by separate accounts that invested in funds, some of which were organized as partnerships, and paid investment expenses to its nonlife affiliate for these funds, the IRS found that the taxpayer should not reduce its gross investment income by investment expenses when computing its gross investment income under the proration calculation under Section 812; should include in amount retained the amount transferred from the separate account and paid by taxpayer to its nonlife affiliate as investment fees; and may deduct investment expenses even if it paid them from dividend income for which it received a dividends received deduction.

New York Tax Department Releases Draft Regulations on Combined Reports, Revises Proposed Regulations on Nexus for Business Franchise Tax Purposes
The New York State Department of Taxation and Finance has released draft amendments to the Article 9-A corporate franchise tax regulations to address significant changes to combined reporting under New York State corporate tax reform legislation, which went into effect for tax years beginning on or after Jan. 1, 2015. The regulations describe the requirements for filing a combined report and the criteria for the commonly owned group election. They also include factual scenarios for when a unitary business will be presumed, and examples to illustrate indicia of ownership and control. The Department also revised proposed regulations on nexus to implement legislative expansion of the activities that subject a foreign corporation or unitary group to tax to include issuing credit cards in New York State and deriving receipts from activity in New York State when certain designated thresholds are met.

Delaware Passes Tax Changes Phasing in Single-Sales-Factor Apportionment
Delaware HB 235 reforms Delaware's business tax code by phasing in single-sales-factor apportionment by 2020. Currently, companies pay the tax based on the share their sales, employees and property in Delaware.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2016 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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