AICPA Tax Division
Comments on the
2007-2008 Guidance Priority List (Notice 2007-41)
May 31, 2007
Corporations and Shareholders Taxation Technical Resource Panel (Andrew Cordonnier, Chair, (202) 521-1502, ; or George L. White, AICPA Staff Liaison, (202) 434-9268, ) NOTE: Comments are listed in priority order.
- Finalization of the “No-Net-Value” regulations.
- Guidance is needed regarding the ultimate recovery of capitalized transaction costs (e.g., bankruptcy costs, IPO costs, etc.).
- Finalization of regulations issued under section 368(a)(1)(F), relating to a mere change in identity, form, or place of organization of one corporation.
- Guidance is needed on the application of section 382, including—
§ The application of sections 382(l)(5) and (6) to consolidated groups;
§ The scope of, and exceptions to, section 382(l)(1); and
§ The application of section 382(h)(6) and/or clarification of the application of Notice 2003-65.
§ The application of section 382(l)(3)(C) regarding relative fluctuations in value.
- Guidance is needed under section 355, including—
§ Satisfaction of business expansion under section 355(b) through stock and asset acquisitions; and
§ Finalization of regulations regarding predecessors and successors under section 355(e).
- Guidance is needed to conform the diversification standards of section 351(e) to those of section 368(a)(2)(F).
- Finalization of regulations issued under section 1502 regarding liquidations under section 332 into multiple members.
Employee Benefits Taxation Technical Resource Panel (Sandy Wheeler, Chair, (202) 4141856, ; or Lisa A. Winton, AICPA Staff Liaison, (202) 434-9234, ) NOTE: Comments are listed in priority order. The AICPA recognizes that the IRS has an extensive list of items in the benefits area requiring guidance and we agree that those items should be addressed first. However, we also believe the following items should be addressed at a later date.
1. Guidance under section 1341 specifically focused on the tax treatment of amounts not received that were previously included in income under sections 402(b) or 409A.
2. Guidance regarding the tax treatment of bonuses paid to employee S corporation shareholders when an ESOP owns only a portion of the S corporation.
3. Guidance is needed on how to qualify for self-correction when moving from a document of one service provider to another service provider and changes were unintentionally made to the document during this process. Operational inconsistencies need to be addressed.
4. Guidance is needed on 401(k)/(m) testing for mergers and acquisitions occurring during a plan year; and clarification of the successor employer and severance of employment concepts.
5. Final regulations are needed on the section 408(q) requirement to establish a separate trust for the deemed IRA contributions.
Exempt Organizations Technical Resource Panel (Mary Rauschenberg, Chair, (312) 486-9544, ; or George White, AICPA Staff Liaison, (202) 434-9268, ) NOTE: Comments are listed in priority order.
1. Guidance is needed under section 512 for a simplified and uniform method of cost allocation for large organizations to use for UBIT activities.
2. Additional guidance is needed under section 512 to determine how to apply rules on UBIT, lobbying expenditures and political intervention to Internet activities of tax-exempt organizations.
3. Guidance is needed to formulate established methods under voluntary compliance programs for exempt organizations to come in and correct improper positions taken with regard to IRS forms and procedures.
Individual Taxation Technical Resource Panel (Lorraine D. Evans, Chair, (916) 685-8775, ; or Lisa A. Winton, AICPA Technical Manager, (202) 434-9234, ) NOTE: Comments are listed in priority order.
1. Guidance is needed regarding the proper handling of the exclusion of gain on sale of personal residence as part of an installment sale and as part of a like kind exchange where a personal residence is both a personal residence and concurrently has a business use, such as an office in the home, day care segments and/or held for investment such as a portion of a home or rooms held for rent.
2. Section 163(h)(4)(A) generates uncertainty about how to define a qualified residence or a second residence in the context of divorce. Does the use by the former spouse or children qualify as use by the taxpayer as a residence? Does the taxpayer responsible for the mortgage need to own the underlying property before the interest is deductible? For example, the husband may transfer ownership of the residence to the wife but remain responsible for the mortgage. Is the interest deductible? Temporary reg. section 1.163-10T(o)(1) appears to not require 100 percent ownership of the residence, but requires the taxpayer's interest in the dwelling be security for the entire mortgage.
3. Guidance is needed on how to coordinate a tuition payment and the receipt of a distribution from a Section 529 Plan. Specifically, if a taxpayer makes a tuition payment in 9/06, but receives the 529 distribution in 1/07 – assuming no other tuition payments are made – is the 2007 distribution taxable? Section 529(c)(3) does not address the question, however IRS Publication 970 states that the tuition payment and the distribution must be in the same year.
4. Guidance is needed on using deferred vacation home losses to offset gains on the sale of the vacation property under section 280A. Section 280A limits the current deductibility of expenses associated with vacation home rentals; however, excess deductions may be carried over to succeeding years. Guidance must resolve the question of whether gain from the sale of the vacation property is considered gross rental income that would allow the excess deductions to be taken in the year of the sale.
5. Guidance is needed to assist taxpayers in determining the qualifications required in order to file as a “trader” as opposed to an “investor.” No “objective” tests currently exist to determine the qualification of a taxpayer engaged in the business as a trader in securities (which provides the ability to report trading related expenses as ordinary business expenses). Instead, the determination for this qualification is dependent on existing tax court cases which are ambiguous and leave room for interpretation.
6. Guidance is needed on reverse section 1031 exchanges to include the proper treatment of expenses paid by the taxpayer in connection with operating the activity while leasing the property from the accommodation titleholder. These expenses may include loan closing costs paid by the taxpayer on a loan for which the accommodation titleholder is responsible.
International Taxation Technical Resource Panel (Paul Schmidt, Chair, (202) 861-1760, ; or Eileen R. Sherr, AICPA Technical Manager, (202) 434-9256, ) NOTE: Under each numbered category, the first three bulleted items are the most important.
1. Guidance is needed in the following areas related to Subpart F/Deferral:
§ Provide regulations under section 954(h) on the subpart F exception for active financial services income, especially with regard to the application of the substantial activity requirement of section 954(h)(3)(C) and the “substantially all the activities” requirement of section 954(h)(3)(A)(ii).
§ Provide regulations under section 954(c) relating to the active rent or royalty exception. Also, consistent with the legislative history of the 2004 American Jobs Creation Act and Notice 2006-48, issue regulations providing exceptions from income inclusions under sections 956 and 367(a) for aircraft and vessel leasing that is compliant with section 954(c)(2)(A).
§ Finalize the proposed regulations under section 959 regarding exclusions from income of previously taxed earnings.
§ Provide guidance under section 961(c) regarding basis adjustments to the stock of a CFC held through partnerships.
§ Finalize the proposed section 898 regulations on conforming year-ends of certain foreign corporations to the year-ends of their U.S. shareholders.
§ Provide guidance to explain the application of section 304(b)(5).
§ Provide more complete and definitive guidance under the PFIC regulations. In particular, (1) update the PFIC regulations to take into account the enactment of section 1297(e), which eliminates the overlap of the PFIC and Subpart F regimes under certain circumstances (including the application of section 1297(e) to a PFIC owned by a U.S. partnership that has U.S. partners), (2) provide guidance under section 1297(c) regarding the 25 percent ownership look-through rule and its interaction with the section 1297(b)(2)(C) related party income rules, and (3) provide guidance on the application of section 1297(b)(1)’s definition of passive income and in particular on the interaction of section 954(h) and (i) with section 1297(b)(2).
§ Issue regulations pursuant to Notice 2007-13 regarding the substantial assistance rules for foreign base company services income.
§ Provide guidance with respect to the reg. section 1.954-2(b)(4) substantial assets test relevant to qualification under the same country exception for interest and dividends, as applied to (i) stock in non-CFC foreign corporations and (ii) banks and insurance companies.
2. Guidance is needed in the following areas related to inbound transactions:
§ Reissue proposed section 163(j) “earnings stripping” regulations, taking into account taxpayer comments and developments since the original issuance of the proposed regulations.
§ Provide guidance under section 267(a)(3)(B) regarding the timing of deduction for payments to CFCs and PFICs and provide exceptions for appropriate transactions.
§ Provide guidance on the application of temp. reg. section 1.897-6T and section 1445 to nonrecognition transactions involving transfers of USRPIs to partnerships, and dispositions of interests in partnerships that directly and indirectly hold USRPIs.
§ Provide guidance regarding new Form 8804, particularly whether a partnership that must withhold under section 1446 with respect to effectively connected taxable income allocable to foreign partners is entitled to take into account otherwise allowable deductions in the relevant taxable income computations.
§ Following the retroactive withdrawal of reg. section 1.1441-1(b)(7)(iii) by T.D. 9323, guidance on liability of a withholding agent for interest with respect to withholding under section 1445 or section 1446, if the withholding agent does not withhold with respect to a foreign person that has no U.S. tax liability, or that has satisfied its U.S. tax liability.
3. Guidance is needed in the following areas related to outbound transactions:
§ Provide guidance on the treatment of gain recognition agreements (GRAs) under section 367(a) upon a section 355 distribution (including treatment of foreign transferors and foreign transferees). [Note: See AICPA comments to IRS on Notice 2005-74, Section 3.02 regarding the effect of certain exchanges on gain recognition agreements under section 367(a) submitted on February 21, 2006, available at:
http://tax.aicpa.org/Resources/International/Regulation+and+Administration/AICPA+Comments+on+Notice+2005-74+on+the+Effect+of+Exchanges+on+Gain+Recognition+Agreements.htm]
§ Issue regulations under section 367(a)(5).
§ Issue further guidance on the application of new section 7874 relating to inversion transactions, including the following issues: (1) whether, in applying the ownership test to former shareholders of the acquired U.S. entity, the term “shareholder” includes indirect ownership or only direct ownership; (2) the requirement that such acquisition be pursuant to a plan or a series of related transactions; (3) the treatment of stock sold in a public offering that is related to the acquisition, including defining what constitutes a public offering; and (4) with respect to the special rule in section 7874(c)(5) for related partnerships in which all commonly controlled partnerships are aggregated, clarify (i) whether the rule applies to both domestic and foreign partnerships and (ii) for which purposes aggregation is required.
§ Finalize the proposed regulations under section 1248 regarding dispositions of certain foreign corporations by foreign partnerships with U.S. partners; and provide guidance under section 1248 regarding dispositions by U.S. persons of foreign partnership interests where the foreign partnership owns stock in a controlled foreign corporation and the U.S. partner is a United States shareholder with respect to the controlled foreign corporation.
§ Issue updated regulations under section 367(d), reflecting changes to the statute since their original issuance. We also suggest interim guidance be issued on the changes to section 367(d) under Section 406(a) of the American Jobs Creation Act of 2004, including the retroactive application of that provision.
§ Issue guidance under new section 332(d) regarding its interaction with section 337.
§ Finalize the proposed section 987 regulations relating to foreign currency translation gains and losses with respect to branch transactions (taking into account public comments with respect to the proposed regulations). [Note: See AICPA comments to IRS submitted on March 29, 2007, available at: http://tax.aicpa.org/Resources/International/Regulation+and+Administration/AICPA+Comments+on+Foreign+Currency+Transaction+Regulations.htm]
§ Issue guidance under section 1248(f)(2) addressing certain distributions of stock of foreign corporations to domestic corporations.
§ Issue guidance relating to the carryover of tax attributes in section 355 transactions. The IRS has issued proposed regulations under section 367(b) addressing these issues (i.e., reg. section 1.367(b)-8).
4. Guidance is needed regarding foreign tax credits, in particular:
§ Issue guidance on recharacterization of overall domestic losses under section 904(g), including guidance with respect to the interaction with section 904(f) and ordering rules.
§ The section 904(f) regulations relating to overall foreign losses should be revised to replace the outdated 1987 regulations and Notice 89-3.
§ Repropose the proposed regulations providing guidance under section 901 on the allocation of foreign taxes in circumstances involving (i) hybrid entities and the technical taxpayer rule (issued on August 3, 2006) and (ii) noncompulsory foreign taxes paid under foreign consolidated regimes or certain structured passive investment arrangements (issued on March 29, 2007) after public comments are considered on the current proposed regulations.
§ Issue guidance under new section 904(f)(3)(D), relating to the application of the overall foreign loss rules to certain dispositions of CFC stock, and, in particular, section 368(a)(1)(B) reorganizations, as well as relating to the provision’s interaction with section 355.
§ Issue guidance relating to the application of the overall foreign loss rules to certain dispositions involving partnerships.
§ Guidance is needed under section 905(c) regarding taxes paid after a liquidation, stock sale or section 338 election.
§ More complete guidance regarding the application of reg. section 1.865-1(a)(2) and reg. section 1.865-2(a)(3) under which losses are allocated to reduce foreign source income if gain on the sale of the property (including stock) would have been taxable by a foreign country and the highest marginal rate of tax imposed on such gains in the foreign country is at least 10 percent.
5. Guidance is needed in the following additional areas:
§ Guidance with respect to the characterization of guarantee fees under applicable U.S. international tax principles, including sourcing for foreign tax credit purposes.