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BHBM Tax Alert 1/28/2010

Thursday, January 28, 2010

By: Matthew P. Miller, Esq.

FEDERAL

Grouping and Regroupings of Activities Under IRC §469

The IRS issued Rev. Proc. 2010-13 which requires taxpayers to report to the IRS groupings and regroupings of activities for purposes of IRC §469 passive loss rules.  These rules are effective for tax years beginning on or after January 25, 2010.

Generally

IRC §469 provides that losses from and credits attributable to passive trade or business activities are disallowed and carried over to subsequent taxable years to the extent those losses exceed income from all such passive activities.  The rules for grouping a taxpayer's trade or business activities and rental activities are contained in Treas. Reg. §1.469-4.  Treas. Reg. §1.469-4(c)(1) provides that one or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of IRC §469.

This revenue procedure applies to all taxpayers to which the rules in Treas. Reg. §1.469-4 apply.

New Groupings

A taxpayer must file a written statement with an income tax return in the first taxable year in which two or more trade or business activities or rental activities are originally grouped as a single activity.  The statement must identify names, addresses and employer identification numbers (if applicable) for the trade or business activities or rental activities that are being grouped as a single activity.

Addition of new activities to existing groups

If a taxpayer adds a new trade or business activity or rental activity to an existing grouping for a taxable year, the taxpayer must file a written statement with the tax return for that taxable year containing the names, addresses and employer identification numbers (if applicable) for the new trade or business activity or rental activity that is being added to the existing grouping, as well as similar information for activities already within the existing grouping.

Regroupings

If the taxpayer's original grouping was clearly inappropriate or a material change in facts and circumstances has occurred that makes the original grouping clearly inappropriate, the taxpayer must regroup the activities. If this occurs, the taxpayer must file a written statement with the taxpayer's tax return for the year in which the activities are regrouped.  The statement must identify similar items to the above and an explanation of either why the original grouping was inappropriate or the nature of the change causing the grouping to become inappropriate.

Pre-Existing Groupings

A taxpayer is not required to file a written statement reporting the grouping of the trade or business activities and rental activities that have been made prior to the effective date of Rev. Proc. 2010-13 until a change occurs-either a new grouping, a regrouping or an addition of a new activity to an existing grouping.

If a taxpayer fails to report under the new grouping activities, then every activity will be treated as a separate activity for purposes of applying the passive activity loss and credit limitation rules of IRC §469.  There are certain relief provisions contained in Section 4.07 of this revenue procedure.

Depreciation of Offshore Support Vessels

In TAM 201001018, the IRS held that offshore support vessels which are primarily used to transport supplies, equipment and personnel in offshore oil and gas operations are classified in asset class 13.0 rather than asset class 00.28 under Rev. Proc. 87-56.  This conclusion enabled the taxpayer in question to depreciate the vessels over a five (5) year period rather than a ten (10) year period.

This TAM cannot be cited as precedent pursuant to IRC §6110(k)(3).

2010 Tax Quick Facts

The maximum contribution that can be made to a defined contribution plan in 2010 under §415 is the lesser of $49,000 or 100% of the participant's compensation.

The limit on employee elective deferrals to §401k and §403(b) plans is $16,500 in 2010.

The limit on IRA contributions for 2010 is $5,000.  Individuals that are age 50 or older can contribute an extra $1,000 under a special catch-up provision.

Even though there is currently no estate tax in 2010, the gift tax remains in full force and effect.  The federal annual gift tax exclusion amount is $13,000 for 2010.  The lifetime gift tax exemption is $1,000,000.

Current Reporting Issues

The Government Accountability Office released a report on January 14, 2010 which provided that Congress should require "S" corporations to calculate and report shareholders' stock and debt basis on annual Schedule K-1s.  This would increase the burden on accountants who prepare tax returns for "S" corporations.  The Government Accountability Office also reported that the IRS has data which shows that about 68% of S corporation returns that were filed for tax years 2003 and 2004 misreported at least one item.

IRS has begun to audit business compliance with IRC §409A even though there is still some confusion in complying with the new rules that were issued in January 2009.

Unless and until Congress enacts a new estate tax law, there is currently no estate tax for decedents dying in 2010.  One of the provisions that sunset in 2010 along with the estate tax is the basis step-up at death under IRC §1014.  Rather than a basis step-up at death, for decedents dying in 2010, there is a modified carryover basis rule which is found in IRC §1022.  Under IRC §1022(a), the recipient of a decedent's property will receive a basis equal to the lesser of the adjusted basis of the property in the hands of the decedent or the fair market value of the property at the decedent's death.  Therefore, in order to fully take advantage of the modified carryover basis rule, the estate must prove the decedent's basis in property at death or the IRS may attempt to automatically assign a zero basis to the property.  This likely means a reporting nightmare for the estates of those decedents dying in 2010 unless Congress enacts a retroactive estate tax with a new basis rule.

Extended Deadline for Certain Information on Form 1099

IRS Notice 2010-9 clarifies that certain filers of Form 1099-B, Form 1099-S, and certain information on Form 1099-MISC have until February 16, 2010 to report the information required on these forms.

STATE AND LOCAL

Parish E-File.com

Businesses that collect and remit sales and use taxes to state and local governments may now use Parish E-File.com to electronically file these sales and use tax returns.  There is no cost to this website as it is a free public service provided by the Louisiana Department of Revenue.

For more information, please click here

If you would like to receive BHBM Email Tax Alerts to stay informed on the latest changes in tax law on the Federal and State level, please email Stacey Lala at slala@bhbmlaw.com.