Tax Hot Topics
From Grant Thornton's Washington National Tax Office

March 11, 2013 | THT 2013-05

  Submit RFP | Subscribe | LinkedIn  | Twitter

Retirement benefits survey
Cost-management approaches that work
Grant Thornton recently asked employers whether they use certain approaches to manage retirement benefit costs and if so, how effective they are. Find out what  they think has worked best.


Grant Thornton insights

Accounting methods and periods

Corporate transactions and operation

IRS practice and procedure

State and local tax

Tax legislative update

Subscribe | Contact us



Share how your organization manages health care costs
Managing the cost of employee health care benefits is top of mind for you and other executives. Grant Thornton's Compensation & Benefits Consulting practice has developed the 2013 Health Care Benefits Cost Management Survey questionnaire to elicit information and leading practices that will help readers of the survey results better manage costs in this area. Please consider taking the survey, or if you are not the most appropriate person in your company to complete the survey, please feel free to send it to your colleague. Survey results will be shared with respondents who request them, and all survey responses will be confidential.

Back to contents

Hear the latest about income tax provision calculations
Learn about new developments and significant issues that affect quarterly and annual income tax provision calculations at a webcast on March 21 at 3 p.m. Eastern. The webcast, "Accounting for income taxes: ASC 740 quarterly update," is part of a series sponsored by Grant Thornton's Tax Accounting and Risk Advisory Services practice.

Learning objectives:

Back to contents

Tune in to state and local tax hot topics related to ASC 740 and ASC 740-10
The state taxation landscape – laws, regulations, rulings, audits, hearings, court cases and administrative practices – is changing dramatically. Join our webcast to hear about how those changes intersect with ASC 740 (formerly FAS 109) and ASC 740-10 (formerly FIN 48) formal guidance regarding state income taxes. The webcast is scheduled for March 25 at 3 p.m. Eastern.

Learning objectives:

Back to contents


Provision of software does not affect status as a qualified intermediary
The IRS has concluded in a recent private letter ruling (PLR 201308020) that the provision of software to clients in a like-kind exchange program does not affect a taxpayer’s status as a qualified intermediary (QI).

The taxpayer requesting the ruling offered Section 1031 services to clients that engaged in a series of ongoing exchanges of tangible personal property (LKE programs). The taxpayer served as a QI for its clients and provided its in-house–developed software to clients in its LKE program. The software helped clients track and manage their exchanges, and helped the taxpayer to fulfill its obligations as a QI. Specifically, the software helped to:

Treas. Reg. Sec. 1.1031(k)-1(g)(4)(iii) defines a QI as a person who (i) is not the taxpayer or a disqualified person, and (ii) enters into a written agreement with the taxpayer (the “exchange agreement”) and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property and transfers the replacement property to the taxpayer.  

Treas. Reg. Sec. 1.1031(k)-1(k)(2) defines a “disqualified person” to include an agent of the taxpayer at the time of the transaction. For this purpose, a person who has acted as the taxpayer’s employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two-year period ending on the date of the transfer of the first of the relinquished properties is treated as an agent of the taxpayer at the time of the transaction.

The IRS concluded in the ruling that providing software to the taxpayer’s LKE program clients did not make the taxpayer an agent of its clients. The software supplied by the taxpayer enabled an LKE program client to manage a high volume of exchange transactions. The software also assisted the taxpayer in fulfilling its obligations as a QI. The matching of relinquished and replacement properties, and the preparation and submission of 45-day identifications are services described in the regulations under Section 1031 that are not to be taken into account in determining whether a person is an agent.

In addition, although the software computed depreciation and the gain or loss from an LKE program client’s transactions, these functions did not result in the taxpayer’s being considered an accountant for its clients. The depreciation and gain or loss functions were essentially automated math calculations based on data input by the LKE program client and did not rise to the level of an accountant-client or other agency relationship. Accordingly, the taxpayer was not a disqualified person to an LKE program client under Treas. Reg. Sec. 1.1031(k)-1(k) as a result of providing software with the functions described.

 Back to contents

IRS rules banks with OREO property are not subject to UNICAP
The IRS National Office has concluded in a generic legal advice memorandum (GLAM 2013-001) that “other real estate owned” (OREO) by a bank through foreclosure is not property acquired for resale within the meaning of Section 263A(b)(2) if the bank originated the loan. Therefore, the costs incurred while holding the property for sale are not required to capitalized under the uniform capitalization (UNICAP) rules of Section 263A.

The GLAM was released on March 1, 2013, and directly contrasts with the position the IRS has taken in exam. A recent field attorney advice (FAA 20123201F) from the Large Business & International Division concluded that Section 263A does apply to OREO property acquired through foreclosure.

Under Section 263A, resellers are generally required to capitalize the acquisition costs and certain indirect costs that can be allocated to property acquired for resale. Banks have typically taken the position that though held for sale, the OREO is not property “acquired” for resale. This is because banks are not in the business of acquiring real property for resale. They are in the business of making loans backed by the real property, and they acquire real property only when the loan is in default.

Treas. Reg. Sec. 1.263A-1(b)(13) provides that the origination of loans is not considered the acquisition of property for resale. The GLAM therefore concludes that the acquisition and sale of the property for which a loan is secured does not convert a bank into a reseller if the foreclosure and subsequent sale of the OREO are properly viewed as an extension of a bank’s loan origination activity.

 Back to contents


IRS concludes guarantee is an amount ‘at risk’ under Section 465
The IRS has concluded in a legal memorandum (ILM 2013-08-028) that an individual’s guarantee was an amount at-risk for purposes of Section 465.

The facts presented in the ILM provided that an individual (T) was the sole owner of a limited liability company (X), which was disregarded from its owner for federal tax purposes (a DRE). X then directly owned another limited liability company (Y), which was also a DRE. In addition, T directly owned two S corporations (M and N). In Year 1, Y borrowed cash (the debt) from an unrelated lender for its business. Under the debt agreement with the lender, T, X, M and N each guaranteed the payment of X’s debt to the bank.

Also in Year 1, T entered into a separate agreement to personally guarantee the debt (the personal guaranty). Under the personal guaranty, T absolutely and unconditionally guaranteed full repayment of the debt, and T did not waive his rights of subrogation and reimbursement against Y, or his rights of contribution from M, N and X as coguarantors in the event that T was called upon to repay the loan under the personal guaranty.

 In Year 2, the debt was modified to include T as a coborrower and released T as a guarantor under the debt agreement. T had not made any payments to the bank related to the debt.

Under Section 465(a)(1)(A), an individual engaged in an activity of carrying on a trade or business or for the production of income is allowed loss from such an activity only to the extent of the aggregate amount that the taxpayer is “at risk.” A taxpayer is considered at risk for an activity for amounts including (i) money and the adjusted basis of property contributed to the activity, and (ii) amounts borrowed with respect to the activity.

Section 465(b)(2) provides that a taxpayer is at risk for a borrowed amount if the taxpayer is either (i) personally liable for the repayment of such borrowed amounts, or (ii) the taxpayer has pledged property as security for the borrowed amounts (the personal liability test). However, Section 465(b)(4) provides that a taxpayer is not at risk for amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements or other similar arrangements.

In applying the personal liability test, the IRS applied the “payor of last resort” standard as provided in Emershaw v. Commissioner (949 F.2d 841), and found that T was the payor of last resort because T would be liable upon Y’s nonpayment. In applying Section 465(b)(4), the IRS applied the “economic realities” standard, as provided in Waters v. Commissioner (978 F.2d 1310).

The IRS therefore concluded that, notwithstanding that T had not waived its right of subrogation and reimbursement from Y, T was not protected from loss related to the guaranteed amount as long as T’s guaranty was bona fide and enforceable by the bank and T was not otherwise protected against under Section 465(b)(4). The IRS concluded, however, that T will not be at risk to the extent that T has a right of contribution or reimbursement from M, N and X.

The IRS also concluded that T will be at risk in Year 2 related to the guaranteed amount due to the personal guaranty as long as the personal guaranty is bona fide and enforceable by the bank and T is not otherwise protected against under Section 465(b)(4).

Back to contents

IRS highlights ACE adjustment in conclusion on built-in loss under Section 382
The IRS has concluded in a heavily redacted legal memorandum (ILM 2013-08-026) that a taxpayer improperly determined that a subsidiary was a net unrealized built-in gain (NUBIG) company at the time of acquisition. The acquisition was a Section 382 ownership change, and as a result, the IRS concluded that the taxpayer’s alternative minimum taxable income calculation was incorrect, because the basis of the acquired subsidiary’s assets should have been reduced under Section 56(g)(4)(G).

Section 382(a) limits the extent to which a loss corporation can use its losses to offset income after an ownership change. Section 382(h)(1)(A) provides that if a loss corporation has NUBIG in its assets, the Section 382 limitation during a five-year recognition period will be increased by any recognized built-in gains for such taxable year. Conversely, Section 382(h)(1)(B) provides that if a loss corporation had a net unrealized built-in loss (NUBIL) in its assets at the time of the ownership change, any recognized built-in loss for a five-year recognition period is subject to the Section 382 limitation in the same manner as if it were a prechange loss.

Under Section 56(g)(4)(G), when a corporation is a NUBIL company, the corporation is required to step down its basis in assets to the fair market value of the assets immediately prior to the ownership change for purposes of determining the corporation’s adjusted current earnings (ACE). Notice 2008-83 originally provided that any deduction otherwise allowable to a bank related to losses on loans or bad debts should not be treated as recognized built-in loss if the loss corporation is a bank within the meaning of Section 581. But Congress enacted legislation in 2009 that terminated the application of this notice prospectively.

The taxpayer addressed by ILM 2013-08-026 appears to have taken the position that, in reference to Notice 2008-83, certain bank loans should be excluded from its calculation of whether the acquired subsidiary was a NUBIG or NUBIL company at the time of the ownership change. As a result, the taxpayer determined that the subsidiary was a NUBIG company. Upon review, however, the IRS asserted that Notice 2008-83 addressed only the recognition of built-in gains and losses, and therefore should not affect the NUBIG or NUBIL determination. The IRS concluded that the taxpayer was a NUBIL company when the excluded assets were taken into account and therefore Section 56(g)(4)(G) should apply to reduce the subsidiary’s basis in assets for ACE purposes.

Back to contents


IRS postpones deadline for election to claim Sandy losses on prior year returns
The IRS has issued guidance (Notice 2013-21) postponing the deadline for making an election to claim Hurricane Sandy losses in a prior year until Oct. 15, 2013.

Section 165(i) allows taxpayers to claim losses from federally declared disasters in the year preceding the year of the actual disaster. The provision is meant to allow taxpayers to obtain the tax benefit of the losses more quickly than they would by waiting to claim them when the return is filed for the year of the actual loss. The regulations generally require the taxpayer to make the election under Section 165(i) by the later of the original due date (without extension) of the return for the year of the disaster, or the due date for the prior year’s return, including any extensions.

Notice 2013-21 allows taxpayers with losses attributable to Hurricane Sandy in any of the federally declared disaster areas to make the election until Oct. 15, 2013.

Back to contents


Illinois Court upholds estimated payment refund claim made through amnesty program
The Illinois Appellate Court held that a taxpayer’s refund request of a good faith estimated payment made through its participation in the 2003 amnesty program was within the applicable statute of limitations. Read more in our SALT Alert.

Kentucky to require filing of disclosure schedule for related-party costs
The Kentucky Department of Revenue announced that for tax years beginning on or after Jan. 1, 2012, corporations and pass-through entities are required to file and attach a related party costs disclosure statement to their forms 720, 720S, 765 or 765-GP. Read more in our SALT Alert.

Maryland Appeals Court rules denial of county credit for state taxes unconstitutional 
The Maryland Court of Appeals ruled that the failure of Maryland law to allow a credit against county income tax for Maryland residents for their pass-through income from an S corporation’s out-of-state activities that was taxed by another state was unconstitutional under the Commerce Clause. Read more in our SALT Alert.

Back to contents


Tax reform picks up momentum as the sequester hits
The automatic spending cuts required by the budget “sequestration” took effect on March 1 without legislative action, but tax reform efforts gained ground last week.

The sequestration results in immediate across-the-board spending cuts, and Treasury announced that it will reduce IRS whistleblower rewards and energy grants under section 1603 of the American Recovery and Reinvestment Act by 8.7%. The president and congressional Republicans continued to negotiate over how to replace the sequestration with other deficit reduction provisions, but a deal does not yet appear close. The core disagreement remains whether to include new revenue increases.

 Senate Republicans last week blocked a Democratic sequestration replacement bill that would have created a new minimum effective tax rate of 30% on taxpayers with more than $5 million in income (phased in beginning at the $1 million income level), denied deductions for “outsourcing” and subjected tar sands to the oil spill liability trust fund tax. The bill failed a 60-vote procedural hurdle on a 51–49 vote, and the Senate then voted 38–62 to reject a Republican alternative without any tax provisions.

Despite the deficit stand-off, bipartisan tax reform efforts have advanced. Ways and Means Committee Chair Dave Camp, R-Mich., said House Speaker John Boehner, R-Ohio, gave him the “green light” and reserved the first bill number of the new session, H.R. 1, for tax reform. Camp has announced 11 bipartisan working groups on various tax reform issues and plans to release a third tax reform discussion draft this week. The new draft will focus on small businesses. The first two discussion drafts addressed financial instruments and international tax rules. The Senate Finance Committee will also be holding weekly private bipartisan member meetings on various tax reform issues.

Despite the momentum, tax reform may still be an uphill battle. Without an underlying agreement on revenue between Republicans and Democrats, it will be difficult to craft a tax reform plan that would satisfy both sides. Leadership on both sides has also expressed reservations in the past.

Back to contents

This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs, and may require consideration of non-tax factors and tax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as

Subscribe: E-mail | RSS | What is RSS?

Contact us: Website | E-mail | 202.296.7800

Washington National Tax Office | 1250 Connecticut Ave, NW, Suite 400 | Washington, DC 20036

Dave Auclair
Managing Principal
Walter Goldberg
IRS Practice & Procedures, Exec. Dir.
Eddie Adkins
Compensation and Benefits Partner
Grace Kim
Subchapter K Partner
David Bowen
Transfer Pricing Principal
Mel Schwarz
Tax Legislative Affairs Partner
Joseph Calianno
International Tax Partner
Jamie Yesnowitz
State and Local Tax Partner
Andrew Cordonnier
Corporate Tax Partner

Production editor

Lynn Ettinger
Lead Editor, Tax and Audit
Content editor
Dustin Stamper
WNTO Director
David Walser
Private Wealth Services, Managing Director