Generally, to be eligible for the domestic production activities deduction (DPAD), a taxpayer must earn gross receipts from a disposition of qualifying production property. This typically involves a sale and delivery of a manufactured product by the taxpayer to a customer. However, the IRS recently ruled that a government contractor made a disposition for DPAD purposes despite the fact that title to the property reverted back to the contractor (Technical Advice Memorandum 201314043, 04/05/2013). The ruling disposition was not requiring
actual delivery of the property to the government when all of the requirements of the statute are otherwise satisfied.

Pursuant to Federal Acquisition Regulations, many government contracts stipulate that: title to property purchased by the contractor in the performance of the contract is transferred directly to the government before the contractor manufactures or produces the end product. Initially, it would seem that a government contractor could never qualify for the deduction because it would impossible to dispose of property of which it never had title. However, the internal revenue code includes an exception for these types of government contracts, allowing contractors to be eligible for the DPAD.

The particular contracts at issue in the ruling also provided that title to the manufactured product reverted back to the contractor and did not call for actual delivery of the property to the government. The product at issue was used for testing and for the production of prototypes. The delivery of an operational product would have come under future production contracts if the program continued. The ruling concluded that the lack of delivery and the reversion of title to the contractor did not prevent the contractor from taking the DPAD, as all of the requirements for taking the deduction were otherwise satisfied and nothing in statute specifically prevented a reversion of title provision. Government contractors engaged in similar contracts should consider whether they are eligible for the DPAD.

Please contact Aronson LLC’s Tax Services Group at 301.231.6200 for more information.

1. Defer Interest Expense Deduction Related to Deferred Income of Foreign Subsidiaries
The proposal would defer the deduction of interest expense. The deferral rule would apply to the extent that interest expense is properly allocated and apportioned to stock of a foreign corporation that exceeds an amount proportionate to the U.S. taxpayer’s pro rata share of income from such subsidiaries that is currently subject to U.S. tax.

2. Determine the Foreign Tax Credit on a Pooling Basis
A U.S. corporation which owns a foreign subsidiary and receives a dividend would be required to determine its deemed paid foreign tax credit on a consolidated basis. The U.S. taxpayer would be required to take into account aggregate foreign taxes and earnings and profits of all of the foreign subsidiaries with respect to which the U.S. taxpayer can claim a deemed paid foreign tax credit.

3. Impose Current Taxation of Excess Returns Associated with Transfers of Intangibles Offshore
A U.S. person that transfers directly or indirectly an intangible asset from the United States to a related controlled foreign corporation (CFC) would be required to treat excess income from transactions related to the intangible as Subpart F income. The requirement would apply if the income attributable to the intangible is subject to a low foreign effective tax rate.

4. Limit Shifting of Income through Intangible Property Transfers
The definition of intangible would include workforce in place, goodwill and going concern value for purposes of I.R.C. Sections 482 and 367(d). Section 482 provides that, in the case of transfers of intangible assets between related companies, the income with respect to the transaction must be commensurate with the income attributable to transferred intangible assets. Section 367(d) imposes taxation on outbound transfers of intangible assets to foreign corporations in nonrecognition transactions.

5. Disallow the Deduction for Non-Taxed Reinsurance Premiums Paid to Affiliates
An insurance company’s deductions would be disallowed for premiums and other amounts paid to affiliated foreign companies with respect to reinsurance of property and casualty risks. The requirement would apply if the foreign re-insurer or its parent company is not subject to U.S. income tax with respect to the premiums received. The proposal would exclude from the insurance company’s income any return premiums, ceding commissions, reinsurance covered or other amounts received with respect to reinsurance policies for which a premium deduction was denied.

6. Limit Earnings Stripping by Expatriated Entities
The proposal would revise I.R.C. Section 163(j) to tighten the limitation on the deductibility of interest paid by an expatriated entity to related persons. The debt-to-equity safe harbor would be eliminated. The 50% adjusted taxable income threshold for the limitation would be reduced to 25%. The carryforward for disallowed interest would be limited to ten years and the carryforward of excess limitation would be eliminated.

7. Modify Tax Rules for Dual Capacity Taxpayers
A dual capacity taxpayer would be allowed to claim the foreign tax credit on the U.S. tax return for the portion of a foreign tax that does not exceed the foreign tax that the taxpayer would pay if the taxpayer were not a dual-capacity taxpayer.

8. Tax Gain from the Sale of a Partnership Interest on Look-through Basis
Gain or loss from the sale or exchange of a partnership interest by a nonresident foreign individual or company generally would be treated as effectively connected with the conduct of a U.S. trade or business.

9. Prevent Use of Leveraged Distributions from Related Foreign Corporations to Avoid Dividend Treatment
The proposal would prevent a U.S. shareholder from treating certain distributions from a foreign corporation as a return of capital instead of an ordinary income dividend under the I.R.C. Section 301 ordering rule. The requirement would apply where a foreign corporation funds a second related foreign corporation with the principal purpose of avoiding dividend treatment on distributions to U.S. shareholders. The U.S. shareholder’s basis in the stock of the distributing corporation would not be taken into account for the purpose of determining the treatment of the distribution under the ordering rule.

10. Extend I.R.C. Section 338(h)(16) to Certain Asset Acquisitions
I.R.C. Section 338(h)(16) generally provides that the deemed asset sale resulting from a Section 338 election is not treated as occurring for purposes of determining the source or character of any item when the foreign tax credit rules are applied to the seller. Section 338(h)(16) prevents a seller from increasing allowable foreign tax credits as a result of a Section 338 election. I.R.C. Section 901(m) disallows a foreign tax credit for foreign taxes paid or accrued after a covered asset acquisition. The proposal would extend the application of I.R.C. Section 338(h)(16) to any covered asset acquisition within the meaning of I.R.C. Section 901(m).

11. Remove Foreign Taxes from an I.R.C. Section 902 Corporation’s Foreign Tax Pool when Earnings Are Eliminated
For purposes of the deemed paid foreign tax credit, foreign taxes paid by a foreign corporation would be reduced when a transaction results in the elimination of a foreign corporation’s earnings and profits other than by a dividend distribution. An example of such transaction is a corporate stock redemption that is treated as a sale or exchange which results in the reduction of the earnings and profits of the redeeming corporation.

Please contact your Aronson LLC tax advisor or Alison Dougherty, International Tax Services at 301.231.6290 for more information.

The failure to apply this foundational sales and use tax concept had a costly result for a Virginia lessee in a recent ruling issued by the Virginia Department of Taxation (Virginia Public Document Ruling No. 13-41, 03/21/2013). The lessee was a hotel operator that leased the furniture, fixtures, and equipment associated with the hotels. The lessor acquired the assets and paid sales tax on the purchase of those assets. Thus, the lessor did not present a resale certificate to the vendor from which the assets were purchased, despite intending to resell (or lease) those assets to a third party. The lessor did not charge the lessee sales tax on the lease payments. The Department assessed the lessee for the unpaid sales tax on the lease payments. The taxpayer contested the assessment by arguing that it did not owe sales tax because the lessor had already paid the sales tax at the time of purchasing the assets.

The Department concluded that the lessor should have purchased the property for resale pursuant to a resale exemption certificate, and should have charged sales tax to the lessee. Unfortunately for the lessee, the Department also found that the lessee’s sales and use tax liability cannot be avoided because of the lessor’s noncompliance with the sales tax collection rules, as the legal incidence of Virginia’s sales tax is on the end purchaser. Finally, the fact that the lessor paid sales tax on the initial purchase had no bearing on the lessee’s lease payments also being subject to tax under the law.

The legal conclusion in this ruling was unfortunately correct, but the lack of an equitable result meant that the Commonwealth earned double the revenue.  Moreover, assuming that the lessor built in to the lease payments its cost of paying sales tax on the purchase, the lessee essentially paid sales tax twice. Granted, the lessor can file a refund and, if the lessee is lucky, receive a refund from the lessor. However, this after-the-fact option will entail making uneasy requests to the lessor that can hamper a future business relationship. Taking the additional time to get it right up front will avoid the pain felt by the taxpayer in this ruling and, more importantly, prevent the state from getting double the taxes.

For more information on your company’s sales and use tax obligations please contact your Aronson advisor or Michael Colavito at 301.231.6200.

They did include some good suggestions.

• Be sure to consider any state laws and regulations that may apply.
• Be sure to make it clear on the website the status as a 501(c)(3).
• Providing something of value to donors may violate the rules against private benefit or inurement, so be sure to disclose the value and a statement that it is de minimus (unless it isn’t).
• Be sure to disclose whether or not, and how much, of a donation is tax deductible for the donor.

Read the letter here.

Once again, we have an issue of claiming value for donated medicine which is an ongoing blight in the nonprofit community, but in this case, the donors say they never gave any donation. The finger-pointing is heated and people are no longer cooperating with the press.

A significant impact is to the recipients of the donated medicine. The restatement has caused organizations that received goods from World Help to go scrambling to ensure their valuation is accurate and supportable.

Restatements are never fun but just think of World Help to help you keep perspective when you feel scandalized by one. Read more about the story here.

Research and Development Tax Credit

The research and development tax credit has been modified to allow a “small business” to receive a refund if the amount of the credit in any year exceeds the state income tax for that year. This is a change from companies receiving the credit being required to carryover any unused credit. “Small business” means a for-profit corporation, limited liability company, partnership, or sole proprietorship with net book value assets totaling, at the beginning or the end of the taxable year for which Maryland qualified research and development expenses are incurred, as reported on the balance sheet, less than $5 million. This change applies to all Maryland research and development tax credits certified after December 15, 2013. The legislation (L. 2013, H386 (c. 109) also increases from $6 million to $8 million the aggregate amount of credits that the Department of Business and Economic Development can approve in each calendar year.

Biotechnology Investment Tax Credits

The eligibility for Maryland’s Biotechnology Investment Tax Credit has also been expanded by legislation recently signed into law by the governor (L. 2013, S779 (c. 75). Under the current version of the credit, companies that have been in active business for more than 10 years generally don’t meet the definition of “Qualified Maryland Biotechnology Company” and are ineligible for a potential investment that would qualify for the credit. The amendment to the law, which applies to credit certificates issued after June 30, 2013, specifies that a “Qualified Maryland Biotechnology Company” will include a biotechnology company that has been in active business for up to 10 years from the date the company first received an investment by an investor eligible for the tax credit. Thus, a company that receives an initial qualifying investment will have an additional ten years to receive further qualifying investments.

If you have any questions regarding these tax incentives please contact your Aronson business advisor or Michael L. Colavito, Jr. at 301.231.6200.

A few different schemes were in place. As part of his leadership position, he was allowed to authorize any vendor contracts up to $50,000.  He arranged for kickbacks  from vendors that totaled $168,000. He signed off on $780,000 worth of invoices for services that were not performed by his wife’s cleaning company. He billed $41,000 for services supposedly performed by students and $153,000 for services supposedly performed by himself after hours. It is unlikely much of any of that will get repaid.

According to the Atlanta Journal-Constitution, “some observers in the city questioned [the organization's] management oversight.”

Read more about the case here.

 Join Craig Stevens and Rob Eby of Aronson LLC for a free webinar led by Brad Olander, CEO of GoldStar, on May 16th at 11am.  During this convenient 30-minute session, we will address common questions including:

•  What does working throughout the year with the audit in mind look like?
• How do you assess potential deficiencies now?
• Who should be involved in the audit planning process?
• What are typical key audit tasks, processes, and deliverables?

 Executive directors, controllers, CFOs, principals and other school professionals serving in an administrative or finance role should register today for this important webinar!

 If you missed April’s webinar: “Financial Reporting-Support your board so they can support you,” be sure to visit our resources page to download the webinar!

On March 19^th, 75 U.S. Senators supported a non-binding vote of approval for the Marketplace Fairness Act of 2013, a heavily-debated bill that is backed by a coalition of brick-and-mortar retailers such as Wal-Mart and Best Buy and vehemently opposed by certain online retailers such as eBay.  Although the vote was only a preliminary approval of a vague summary of the bill that was an amendment to a budget bill, the bipartisan nature of the vote suggests that remote seller legislation could be voted into law this year.

If enacted as is, the bill would allow states to require remote sellers with over $1 million in annual gross receipts to collect sales tax (i.e., “small seller exception”).  Much of the mainstream media coverage on the issue frames the bill as purely an internet sales tax, but it’s important for businesses to realize that the proposed legislation would require a business selling taxable products and services to collect sales tax on its sales regardless of whether the business sells online or otherwise.

Even without the passage of the federal legislation, states have recently been enacting laws that push the bounds of the physical presence standard.  One such state is New York, where the New York State Court of Appeals on March 28^th upheld the constitutionality of the state’s so-called “click-through” or “Amazon” law (Amazon.com LLC v. Department of Taxation and Finance, 601247/2008; Overstock.com v. Department of Taxation and Finance, 107581/2008).  New York’s law allows the state to require an out-of-state company to collect sales tax if the company receives referrals from an in-state resident “affiliate” in exchange for a commission.  Essentially, New York residents that get a commission for having a link on their website to an online retailer’s website were deemed by the court to be the equivalent to having an in-state sales force.  The court distinguished these types of affiliate arrangements with passive advertising efforts that would not create a sales tax collection obligation.

With states taking varying approaches in their attempts to require remote sellers to collect sales tax and with other state courts striking down similar legislation (e.g., Illinois and Colorado), a federal solution is clearly the better solution to the seemingly inevitable result of remote sellers being required to collect tax.  The passing of federal legislation will have an impact on many small businesses, as the current threshold of $1 million in sales will protect only the smallest of companies.   We will be sure to keep you posted with any further developments.

In the meantime, if you have any questions regarding your sales tax collection obligations please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.

• An overall aggregate limit of approximately $3 million in retirement accounts. This limit is tied to the maximums allowed in a defined benefit plan and would be indexed annually. Once the limit is reached, additional contributions would not be permitted.
• The capping of retirement plan and IRA contributions at the 28% tax bracket, with taxpayers in higher brackets having their tax benefit reduced.

With more and more stories about the dire retirement prospects for many Americans, it is hard to believe that these provisions — or anything similar — will be passed by Congress. These types of provisions often cause business owners to reconsider the merits of offering a plan, ultimately hurting those who need the plan the most. We seem to hear every day about the demise of the pension system and how all Americans will be responsible for accumulating assets for their retirement, but yet the government may enact provisions that inhibit our ability to do so. If you should have any questions regarding these or any other retirement plan provisions in the Obama Budget, please contact Mark Flanagan of Aronson’s Employee Benefit Plan Services Group at 301.231.6257.