Tax Watch: Rules on stock-based compensation are final

The Department of the Treasury and the Internal Revenue Service have issued final regulations on the tax treatment of stock-based compensation where related-party transfer-pricing governing is used in qualified cost-sharing arrangements.

“It is critically important,” says Pamela Olson, the Treasury Department’s assistant secretary for tax policy, “to ensure that related-party transactions, particularly transactions involving cross-border transfers of valuable intangible assets, are treated appropriately for tax purposes.”

According to the joint news release by the Treasury Department and the IRS, in order for an arrangement to be considered qualified, the participants in the arrangement must share all costs related to the development of intangibles in the same proportion that they share the reasonably anticipated benefits.

The final regulations generally follow the proposed regulations that were published July 29, 2002. As under the proposed regulations, the final regulations clarify that stock-based compensation, like other compensation, must be taken into account in determining the costs of a participant.

The final regulations also provide rules for measuring the cost associated with stock-based compensation, generally allowing taxpayers a choice of measuring the cost based on the stock price at the date of exercise or the “fair value,” as noted in financial statements, at the date of grant.

In response to comments received after the regulations were proposed, the availability of the fair-value method of measurement has been expanded in the final regulations.

Initiatives planned for rural areas

* Sen. Charles E. Grassley, the Iowa Republican who heads the Senate Finance Committee, has announced that he plans to review and promote tax initiatives to benefit rural communities.

He has invited business and government representatives to speak to him about tax issues affecting renewable-energy industries and farm cooperatives.

The hearings he plans will reportedly give Mr. Grassley a chance to analyze the issues in greater detail before turning his attention to a broader set of proposals included in an energy bill (HR 6) that is headed to a House-Senate conference committee.

The hearings will also give Mr. Grassley an opportunity to publicize the proposals that he has advanced.

These include tax cuts for renewable energy, tradable tax credits for electric cooperatives, and an expansion and extension of the ethanol tax credit. He packaged many of these proposals in the larger Senate energy bill.

However, although both the House and Senate have passed energy legislation, neither chamber has appointed conferees to settle differences between the two bills.

House leaders have announced plans to appoint conferees within the next couple of weeks. W.J. “Billy” Tauzin, R-La., chairman of the House Energy and Commerce Committee, has suggested that conferees will finish their work on a conference report by the end of September.

No need to worry about these rulings

* In an effort to make life easier and less confusing for taxpayers and their advisers, the IRS has published a list of rulings that it says are now obsolete.

The IRS has also announced that it is continuing its program of reviewing rulings (including revenue rulings, revenue procedures and notices) published in the Internal Revenue Bulletin to publish lists of rulings that, though not revoked or superseded, are no longer considered determinative.

One of the reasons may be that the applicable statutory provisions or regulations have been changed or repealed. Another may be that the ruling position has been specifically covered by a statute, regulation or subsequent published position. Additionally, the facts set forth may no longer exist or are not sufficiently described to permit clear application of the current statute or regulation.

Cite: Rev. Rul. 2003-99

IRS going weekly with tax bulletin

* The IRS has begun publishing the Digital Dispatch, an electronic newsletter for tax professionals, on a weekly basis, instead of biweekly. By sending the e-mail dispatch out each week, the IRS says, it can better help tax professionals stay current with important developments.

The Digital Dispatch is currently e-mailed to 100,000 subscribers free of charge. It provides important upcoming tax dates and events, and summaries of and links to IRS news releases, alerts and technical guidance.

Anyone with e-mail and access to the Internet can subscribe by visiting irs.gov.

New rules define tax-exempt limits

* The IRS has published final regulations on arbitrage and private-activity restrictions for tax-exempt bonds issued by state and local governments. They have also provided guidance on the definitions of “investment-type property” and “private loans.”

The final regulations are effective Oct. 3 and apply to bonds sold before that date that are not subject to regulation Sections 1.141-5, defining private-activity bonds, and 1.148-1.

Section 148, the arbitrage bond restrictions, prohibits the use of exempt bond proceeds to acquire investment property with a yield higher than that of the issue. The old rules outlined when a prepayment for property or services resulted in investment-type property.

Those rules included a business purposes exception, which the final regulations delete, and a “customary” exception, which the final regulations retain.

Cite: T.D. 9085

Parent firm winner of complex case

* The 1st U.S. Circuit Court of Appeals, reversing the U.S. Tax Court, recently ruled that because the obligation underlying a capital loss was held by a non-member, the parent corporation was permitted to deduct $14.9 million on its 1987 return – filed after the non-member became a subsidiary.

Textron Inc. of Providence, R.I., considered to be the common parent of an affiliated group of corporations under the tax rules, filed a 1987 consolidated tax return. Two members of the group were AVCO Corp. of Lowell, Mass., and Paul Revere Corp. of Worcester, Mass.

In 1967, Revere purchased 4 million shares of AVCO. AVCO then acquired Revere’s stock, and Revere became a member of the AVCO group. AVCO then redeemed Revere’s AVCO stock for a note with a value of $40 million, and other property.

Revere realized a $55 million loss on the stock redemption, but under the tax rules, it couldn’t recognize it. However, by 1985, Textron had acquired 80% of AVCO’s stock, and AVCO and Revere became Textron group members.

In 1987, AVCO redeemed its note from Revere for $40,419,005 in cash, and Revere was liquidated into AVCO in a tax-free Section 332 complete subsidiary liquidation Dec. 30, 1987.

Textron, as parent of the Textron group, claimed on its 1987 tax return a $14.9 million long-term capital loss on the note redemption.

According to the appeals court, the consolidated-return regulations were “on point, so contrary code provisions didn’t operate, and the stock of the redeeming corporation was not excluded from the definition of property for consolidated-return purposes.”

In other words, the consolidated-return rules were specific enough to eliminate any doubt about other sections of the tax law’s being controlling.

Circuit Court Judge John C. Porfilio, sustaining Textron’s “plain-meaning interpretation” of the regulations, ruled that those rules didn’t defer the claimed deduction.

The appeals court said Textron didn’t meet the third condition, because the obligation underlying the capital loss was held by a non-member, Revere, and thus Textron was entitled to a 1987 deduction.

The appeals court also ruled that Revere had incurred a capital loss, and concluded that Textron, its parent, was entitled to deduct that loss.

The judge rejected the IRS’ claim that the rules referred to AVCO and Revere, and noted that the argument wasn’t supported by the statute or the history of the provision. He rejected the IRS’ reliance on case law and held that the case law didn’t overcome the plain statutory language.

Cite: Textron Inc., et al., v. Commissioner, 1st Circuit

Offer-in-compromise filing to cost $150

* Beginning Nov. 1, the IRS will charge a $150 application fee for the processing of offers in compromise. The IRS expects this fee to help offset the cost of providing this service, as well as reduce frivolous claims.

The IRS expects the fee to reduce the number of offers that are filed inappropriately – for example, solely to delay collection.

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax liability.

Under certain circumstances, the IRS has the authority to settle federal tax liabilities by accepting less than full payment.

All taxpayers who file an offer will have to pay the application fee unless the offer is based solely on doubt as to liability, or the taxpayer’s total monthly income falls at or below income levels based on the Department of Health and Human Services’ poverty guidelines.