Baldwin Haspel Burke & Mayer LLC

BHBM Tax Law Alert 5/25/2012


FEDERAL TAX LAW UPDATES

IRS Announces EINs Limited to One Per Day

In issue number 2012-20 of the IRS e-News for Tax Professionals the IRS announced that effective May 21, 2012, the IRS will begin issuing only one employer identification number per responsible party each day.  This is a reduction from the current limit of five per day.  The limit will apply to all requests regardless of whether such request is made online or by phone, fax or mail.  The IRS kindly apologized if this change affects your current business practice.

The New Role of the Tax Practitioner

Chief Counsel of the Internal Revenue Service, William Wilkins, spoke with attorneys attending the Chicago-Kent College of Law Federal Tax Institute on May 17, 2012 impressing the significant change in the operating environment for tax attorneys and practitioners which requires such professionals to respond with clear, risk-conscious advice to their clients about complex tax positions.  Wilkins stated, “I believe there are increasing opportunities for you, as advisers and advocates, to provide great client service in ways that go beyond being the gladiator in the arena.”  He continued by stating, “In your role as tax advisor in the examination setting, you can help mediate the sharing of business and legal knowledge that is critical to the prompt resolution of tax uncertainty.  And in your role as tax advisor on business transactions, you can help provide your clients with the clear understandings of risk and opportunity that they need to make choices that are suitable for them.”

Wilkins’ comments come in light of new corporate approaches to tax risk caused by certain key factors, including:

1.  The evolution of financial accounting practices that require a comprehensive analysis of reasons for claiming a tax benefit and reserving against tax benefits;

2.  Wider attention to the impact of tax uncertainty on reported earnings;

3.  The leveraging of financial reporting for tax compliance, particularly with the adoption of Schedule UTP (Uncertain Tax Positions);

4.  Decisions by foreign tax authorities, including the United Kingdom and Australia, to assess the tax risk profile of large business taxpayers

5.  The emergence of new legal structures, including whistle-blower rules, that create obligations for reporting certain issues up the corporate chain.

These key factors have caused a decline in aggressive corporate tax promotion, although Wilkins warns that such promotion is not over. Wilkins noted that promoters have shifted their strategies away from sophisticated corporate taxpayers, marketing their structures to wealthy individuals and closely held businesses.  In line with this shift, Wilkins said practitioners would have to spend significant time helping such clients see through pitches from aggressive promoters.

Uncertain Tax Position Filing Rules

The IRS’s new program for taxpayer reporting of uncertain tax positions is producing useful information that will help the Service focus on tax issues requiring broader attention according to senior agency officials.  The three most frequently reported issues seen in the Schedule UTPs filed in 2010 relate to transfer pricing in tax code Section 482, the research and experimentation credit in Section 41, and trade and business expenses in Section 162.  This raises the attention of Louisiana practitioners as the heavily marketed Louisiana state research and development tax credit is “piggy-backed” to the federal credit under Section 41.

Taxpayers are reminded of new filing rules for 2012 with regards to UTPs.  In 2012, all companies with $50 million or more in assets will have to comply with the Schedule UTP filing duties.  Furthermore, commencing in tax year 2014 all Large Business and International group taxpayers with $10 million or more in assets will be required to comply with the Schedule UTP filing duties.

Update to General Asset Accounts (GAAs) Depreciation

To simplify MACRS depreciation for many medium and large corporations that purchase large numbers of depreciable assets each and every year, such corporations may place the like assets purchased in the same year into a General Asset Account (GAA) under Code Section 168(i)(4) and depreciate the GAA as if it is a single asset.  For example, a corporation that buys 100 computers for $1,000 each can depreciate the purchases as a single asset costing a total of $100,000.  However, when an asset is a GAA is disposed of:  (a) the taxpayer continues to depreciate the GAA as if the disposition had not occurred; (b) the asset sold is considered to have zero adjusted basis; and (c) any amount realized on disposition of the asset is treated as ordinary income, up to certain limits.

The GAA rules were explained in detail in pre-existing regulations (see Treas. Regs. § 1.168(i)-1), but were significantly revised as part of the IRS’s “repairs vs capitalization” temporary regulations issued in late December of last year.  The biggest news is that taxpayers can now elect to terminate GAA treatment for qualifying dispositions under a wider variety of circumstances then under the prior regulations.  When a taxpayer makes this election, it removes the asset from the GAA, makes necessary adjustments to the account, and recognizes gain or loss on the asset’s disposition.  In effect, taxpayers may get the “best of both worlds”:  the ability to treat similar assets as one asset for depreciation purposes, and the flexibility to remove a large asset (or a number of smaller assets) from the account when this option produces a better tax result.

STATE TAX LAW UPDATES

Water for Vessels Not Subject to Sales Tax

According to Revenue Ruling No.12-001 issued by the Louisiana Department of Revenue, water that is sold for placement in the water or ballast tanks on a ship is not subject to sales tax and falls within the exemption found in La. R.S. 47:305D(1)(c).

In Louisiana, the sale or use of water is taxable only when it is (1) mineral water, (2) carbonated water, or (3) water put in bottles, jugs or containers.  Questions have recently arisen concerning the taxability of sales of water which is held in large storage tanks primarily for use on vessels.  The primary issue for determination was whether the water was not exempted under La. R.S. 47:305D(1)(c) because it was “put in . . . containers.”

In the Revenue Ruling, the Louisiana Department of Revenue determined that La. R.S. 47:305D(1)(c) does apply to exempt the bulk sale of water to fill a vessel’s tanks for use by the crew, for balance of the vessel, or for use in drilling operations.  According to the Department, a ship’s tank is not the type of container that causes sales of water to be taxable when put therein.  The word “container” has instead been interpreted to mean “containers such as bottles, jugs, and the like.”

If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law on the Federal and State level, please email Katie Kelly at kkelly@bhbmlaw.com.


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