Recent IRS Developments — June 2008

Steven T. Miller, Commissioner of the IRS Tax Exempt and Government Entities Division, stated that the IRS will ensure that charities are furthering a charitable purpose in a manner commensurate with their financial resources. Public charities, unlike private foundations, are not required to spend a minimum amount of their resources on charitable activities. Senate Finance has expressed concern that IRC §6103, which protects the confidentiality of charitable returns, creates a public perception of “imbalance” in IRS enforcement. The IRS also issued guidance reminding IRC §501(c) organizations that they may not engage in political campaign activities in the election year. (IR-2008-61).

The IRS has proposed regulations providing guidance concerning standards in determining whether a transferor or a transferor’s estate should be granted an extension of time to allocate the generation-skipping transfer (GST) exemption to a transfer pursuant to IRC §2642(g)(1). (NPRM REG 147775-06).

The 2007 annual report of the IRS Oversight Board acknowledged progress in modernization, enforcement, and taxpayer service, but concluded that improvement was still needed. Through modern electronic tax administration services, the IRS can provide more opportunities for taxpayers and tax professionals to communicate with the IRS. However, the report concluded that the IRS must modernize its information technology, which is hampered by “archaic computer systems.”

The IRS will issue guidance concerning the special 50 percent depreciation allowance (enacted as part of the Economic Stimulus Act of 2008) under which the taxpayer may take a depreciation deduction equal to 50 percent of the adjusted basis of qualified property (most tangible personal property and computer software) placed in service after 12/31/07 and before 1/1/09. The new depreciation allowance is similar to “bonus depreciation” previously available for certain property placed in service before 1/1/05. Given the similarity in provisions, the IRS guidance will allow taxpayers to generally rely on Regs. §1.168(k)-1. New increased expensing limits will also be addressed. (IR-2008-58).

Treasury has issued proposed regs clarifying IRC §6323, which addresses the priority of federal tax liens against other creditors. Under IRC §6321, the amount of any unpaid tax liability becomes a lien in favor of the United States by operation of law “upon all property and rights to property, whether real or personal.” In some circumstances, the IRS may file the tax lien, in others, not. (It may be in the best interest of the IRS not to file a tax lien where the taxpayer’s ability to earn income would be impaired.) In any event, IRC §6323 provides that the lien imposed by IRC §6321 “shall not be valid” against purchasers or security holders who are without “actual notice” of the lien. Under the proposed regs, if a state requires that a deed be recorded in a public index before being valid, a notice of federal tax lien (NFTL) will not be valid until it is both filed and indexed in the appropriate office. (NPRM REG-141998-06).

The IRS has issued guidance regarding preparer penalty provisions under IRC §6694. (Notice 2008-46). Exhibit 1 of the Notice adds 19 tax returns to the previous list, including Form 1040-SS, and various Forms 1120. Exhibit 2 adds various forms relating to foreign corporations. Exhibit 3 adds two forms to those that would subject the preparer to penalties only if willfully prepared to understate tax liability. Those forms relate to withholding taxes by foreign persons with U.S. real property interests.

Rev. Proc. 2008-16 clarifies situations in which vacation homes will qualify for like kind exchange treatment by establishing a “safe harbor” for determining whether a vacation home meets the “for productive use in trade or business” requirement of IRC §1031. The safe harbor is met if (i) the vacation home is owned continuously by the taxpayer throughout the qualifying use period; and (ii) within each of the two 12-month periods comprising the “qualifying use” period (i.e., 24 months before and 24 months after the exchange), the taxpayer rents the vacation home to another person or persons at fair rental value for 14 days or more, and the period of the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented at fair rental value. Since Rev. Proc. 2008-16 is only a safe harbor, a good exchange could presumably occur in other circumstances as well.

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