Tax Watch: Policy clarified on taxing of foreign dividends

The Department of the Treasury and the Internal Revenue Service have issued notices covering the taxation of dividends paid by foreign corporations under the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003. By reducing the rates of tax for individuals on certain dividends, the 2003 Act reduced the double tax on dividends.

Today, dividends paid by a foreign corporation are subject to the reduced tax rates if it is a so-called qualified foreign corporation.

With certain exceptions, such a corporation pays dividends on common or ordinary stock that is “readily tradable on an established securities market in the United States.” Common or ordinary stock, or American depositary receipts, issued by a foreign corporation meets this definition if the stock trades on Nasdaq or with any exchange registered with the Securities and Exchange Commission.

Dividends paid by a qualified foreign corporation may also be eligible for the lower tax rate if the company is incorporated in one of the countries included on the Treasury’s treaty list. Such corporations must also be eligible for benefits of a U.S. income tax treaty.

Cite: JS-772, JS-776

IRS won’t disclose Liberty Zone data

* After the Sept. 11, 2001, terrorist attacks, President Bush pledged a minimum of $20 billion in assistance to New York for response and recovery efforts. This included tax benefits, commonly referred to as the Liberty Zone tax benefits, that it was estimated would reduce federal tax revenue by $5 billion.

The actual amount of benefits realized will, however, depend on the extent to which taxpayers, and the city and state of New York, take advantage of them.

Now the General Accounting Office has reported that the IRS is collecting, but not planning to report, information for one of the Liberty Zone tax benefits, the business employee credit. The GAO says the IRS isn’t planning to collect or report information about the use of the other six benefits or the revenue loss associated with those benefits.

No basis, no loss for taxpayers

* Taxpayers can deduct up to $3,000 in losses on stock sales in any one year, or use any amount of losses to offset gains. As one taxpayer recently discovered, however, you must be able to prove your basis in that stock.

The U.S. Tax Court recently noted that taxpayers who fail to prove a basis in a sold asset are considered to have a zero basis. In this case, the taxpayers hadn’t establish their basis, and the Tax Court disallowed the losses.

In another example, a taxpayer attempted to deduct losses from an S corporation. Although S corporation losses are passed through to the shareholders, those losses can be deducted only if the recipient has sufficient basis.

The shareholder must establish that he has acquired basis in the stock and debt. To the extent that he does, of course, he then must prove that that basis hasn’t been reduced by prior-year losses.

Taxpayers who fail to prove that they have any basis in an S corporation are considered to have a zero basis in that corporation.

Here, the taxpayer argued that he had established his basis with a bank statement showing that funds of $105,000 were wired into the corporation’s bank account. While the taxpayer argued that the deposits were from his personal account, there was no indication on the bank statement of the source of the funds.

The Tax Court found the taxpayer’s basis in the S corporation to be zero.

Cite: Stephen P. Arnold, T.C. Memo 2003-259

Fishing trip ruled legitimate deduction

* The 8th U.S. Circuit Court of Appeals reversed a District Court and held that the costs of a company’s annual employee fishing trip were deductible business travel expenses and were workplace fringe benefits excludable from the employees’ income.

Townsend Industries Inc. in Altoona, Iowa, held an annual two-day sales meeting followed by a three-day sponsored fishing trip for employees. The IRS assessed employment taxes for two years, finding that Townsend should have treated the trips as employee wages.

Townsend paid the deficiency and sought a refund.

A U.S. District Court, finding Townsend liable for employment taxes, held that the trip hadn’t been an ordinary and necessary business expense, because of a disconnect between the meeting and the trip. The district court noted that Townsend had also failed to show that the trip had been directly related to the conduct of its business.

Chief Circuit Judge Pasco M. Bowman II disagreed with the district court and ruled that Townsend’s fishing trip had been a business trip. The court held that Townsend had properly excluded the trip expenses from its employees’ gross income.

The court found that the District Court had erred in focusing on the voluntary nature of the trip and that Townsend had had a business purpose and an expectation of future benefits.

It dismissed the government’s reliance on an earlier case, noting that that case had involved a trip to the Super Bowl, included families and was little more than a group social excursion. The judge reversed the district court and remanded the case with instructions to enter judgment for Townsend.

Cite: Townsend Industries Inc. v. United States, 8th Circuit

CPA loses appeal in disclosure case

* The 9th U.S. Circuit Court of Appeals recently agreed with a district court and granted the government summary judgment in a certified public accountant’s suit for unauthorized disclosure. The CPA apparently presented no evidence that the IRS had made improper disclosures about him or improper inspections of his records.

The Treasury inspector general for tax administration received a complaint that D. William Wewee had contacted taxpayers and told them the IRS had wrongfully disclosed their tax information. According to the complaint, Mr. Wewee said he would sue the IRS for them in return for part of any recovery.

The inspector general investigated Mr. Wewee for devising a scheme to defraud by deceiving the IRS into making improper disclosures and using the information to file frivolous suits.

An IRS agent, Bruce Mason, got in touch with nine individuals for whom Mr. Wewee had submitted requests, and Mr. Mason testified that he hadn’t told them he was conducting a criminal investigation.

Mr. Wewee claimed that Mr. Mason and others had accessed the records without authorization. The government claimed that the records access had been necessary for the employees’ official duties.

A U.S. district court earlier held that Mr. Wewee’s evidence hadn’t addressed whether Mr. Mason had made any disclosure to Mr. Wewee’s clients about a criminal investigation, and so there wasn’t sufficient evidence for the claim to proceed.

As for the claim that Mr. Wewee’s and his clients’ records had been accessed without authorization, the court said nine of the accesses had been due to Mr. Wewee’s freedom-of-information requests. The others were made by IRS employees whose official duties permit them to inspect records.

The circuit court affirmed the district court’s finding that summary judgment was appropriate because Mr. Wewee and his wife had failed to show unauthorized disclosures of information or to rebut the evidence showing that any IRS employees’ inspections of their information had been authorized.

The appeals court rejected the couple’s request to reopen discovery, noting that they had failed to request discovery.

Cite: D. William Wewee, et al., v. United States, 9th Circuit