Insights & News

Tax Insights, January 13, 2016
Tracking Tax News You Need to Know

January 13, 2016
Publications
IRS Issues Guidance on Revised Employee Plans Determination Letter Program
The IRS issued Notice 2016-3, 2016-3 IRB stating that future guidance will be issued in anticipation of the elimination of the five-year remedial amendment cycle system for “individually designed plans” under the employee plan determination program. Under the notice, controlled groups and affiliated service groups that have previously made a Cycle A election will be permitted to submit determination letter applications during the Cycle A submission period beginning Feb. 1, 2016, and ending Jan. 31, 2017. Further, the expiration dates on determination letters issued before Jan. 4 are “no longer operative.” Additional guidance will clarify the extent to which a determination letter can be relied upon after a subsequent change in law or a plan amendment. The period during which certain employers may, on or after Jan. 1, establish or adopt a defined contribution preapproved plan and, if permissible, apply for a determination letter is extended from April 30, 2016, to April 30, 2017. The future guidance will update Revenue Procedure 2007-44 (providing the rules and procedures for five-year remedial amendment cycles for individually designed plans and the six-year remedial amendment/approval cycles for preapproved plans). Employers can rely on Notice 2016-3 until the revenue procedure containing the remedial amendment procedures is modified to reflect the foregoing changes.

IRS Rules Amounts Received by REMICs in Suit Against Mortgage Sellers Does Not Negatively Impact REMIC
The IRS ruled in Private Letter Ruling 201601005 that a group of real estate mortgage investment conduits (REMICs) that received a settlement from a suit by some of the REMICs’ investors against the sellers of mortgages to the REMICs, based on breaches of representations and warranties with respect to those mortgages, had no negative effect on the REMICs’ compliance with various REMIC requirements, including the requirement that substantially all of the REMICs’ assets be qualified assets.

IRS Rules on Use of Value of Unused Vacation Time to Make Contributions to 401(k)
The IRS ruled in Private Letter Ruling 201601012 that provisions in an employer’s 401(k) plan and its retiree medical expense reimbursement plan that allow employee contributions to those plans of the dollar equivalents of the employees’ unused vacation time do not result in the offering of an additional qualified cash or deferred arrangement pursuant to Section 401(k) (section references are to the Internal Revenue Code of 1986, as amended). The IRS further ruled that in most cases, these contributions will be excluded from the employees’ gross incomes under Sections 105(b) or 106.

Altera Corp. Files New Tax Court Petition on CSAs Involving SBC Costs
Altera Corp. filed a new petition with the Tax Court to challenge the IRS again on whether related parties entering into qualified cost-sharing arrangements (CSAs) are required to share stock-based compensation (SBC) costs under Section 482. The Tax Court recently ruled in favor of Altera Corp. on the same issue for tax years 2004 through 2007, invalidating the requirement in the 2003 final CSA regulations to share SBC costs among related parties. In the petition, Altera Corp. has questioned the validity of “materially the same” rules in the 2009 temporary and 2011 final CSA regulations that are applicable to tax years 2010 and 2011. See our prior coverage of Altera Corp. here and here.

IRS Grants Educational Institutions Penalty Relief for Missing or Incorrect TINS on 2015 Forms
The IRS announced in Announcement 2016-3, 2016-4 IRB that it will not impose penalties under Sections 6721 or 6722 on eligible educational institutions required to file Forms 1098-T, Tuition Statement, for the 2015 calendar year for failure to include a student’s correct taxpayer identification number (TIN) on Form 1098-T. The relief is limited to 2015 Forms 1098-T required to be filed by eligible educational institutions by Feb. 29, 2016, or March 31, 2016 (if filed electronically).

IRS Announces That Church Tax Audit Rules Apply to Employment Tax Inquiries and Audits
The IRS’s Small Business/Self-employed Division announced in a memorandum that it will apply the procedures in Section 7611, which restrict IRS inquiries and examinations involving churches’ tax-exempt status and their unrelated business income, to employment tax inquiries and examinations involving churches.

IRS Withdraws Charitable Contribution Substantiation Regulations
The IRS has withdrawn proposed regulations issued in September 2015 that would have implemented an optional donee reporting procedure, authorized by Section 170(f)(8)(D), for substantiating charitable contributions of $250 or more. The proposed regulations were controversial because, even though the procedures contained in them were optional, donee organizations that elected to use those procedures would have to obtain, store and send to the IRS donor Social Security numbers, causing a potential identity theft problem. See our prior coverage of the proposed regulations here.

Farewell, Pennsylvania Capital Stock and Franchise Tax!
Pennsylvania Gov. Tom Wolf announced the phaseout of Pennsylvania’s Capital Stock and Foreign Franchise tax effective Jan. 1. The Capital Stock and Foreign Franchise tax dates to 1844. It was imposed on corporations with capital stock, joint-stock associations, limited liability companies (LLCs), business trusts and other companies doing business within Pennsylvania. Domestic corporations were subject to the capital stock tax, and foreign corporations doing business in the state were subject to foreign franchise tax. Phaseout of the tax was proposed 15 years ago, but the complete elimination of the tax was delayed several times. The Pennsylvania Department of Revenue noted that the elimination of the capital stock and foreign franchise tax means that many business types, such as S corporations, LLCs taxed as pass-through entities, and business trusts, will be filing their last corporation tax returns for 2015; they should be marked final returns.

California FTB Issues Guidance on CODI
The California Franchise Tax Board (FTB) issued Technical Advice Memorandum No. 2015-02, Dec. 22, 2015, addressing the reduction of tax attributes under Section 108 and whether pre-apportioned excluded cancellation of debt income (CODI) or post-apportioned excluded CODI applies. Cal. Rev. & Tax. Cd. Section 24271(a) incorporates by reference Section 61, which provides that gross income includes income from the discharge of indebtedness. However, CODI is not included in gross income if the debt is discharged due to bankruptcy or insolvency. Where CODI is not included in gross income, Section 108(a)(1) provides that certain tax attributes must be reduced to the extent CODI was excluded. If CODI occurs for reasons other than bankruptcy or insolvency, it is treated as an item of income and apportioned for those taxpayers that conduct business both within and outside California. Since CODI is apportioned generally, post-apportioned excluded CODI should be applied to reduce tax attributes. Moreover, some of the items of tax attributes that are to be reduced, such as NOL carryovers, are post-apportioned amounts. Using post-apportioned excluded CODI to reduce NOL carryovers provides a consistent approach.

Connecticut Issues Guidance on Employment Tax Issues
The Connecticut Department of Revenue Services (DRS) issued a revised Employer’s Tax Guide explaining Connecticut withholding tax requirements. Recent legislation [L. 2015, S1601 (P.A. 15-1), December 2015] excludes from Connecticut income tax any compensation for personal services that a nonresident employee performs in Connecticut if the nonresident employee is present in Connecticut for employment purposes for not more than 15 days during the taxable year. For this reason, DRS is changing its “14 day” rule with respect to withholding. DRS also issued a new publication, Connecticut Policy Statement No. 2015(6), Dec. 30, 2015, explaining the Connecticut sourcing rules and withholding requirements for personal income tax affecting nonresident employees performing personal services in Connecticut for 15 days or less.

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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