Recent events have drawn attention to the disallowance of deductions where allowing the deductions would violate public policy. This article discusses the disallowance of deductions under Sec. 162 and Sec. 165 for public policy reasons.
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TOPICS / CORPORATIONS
Deductions
IRS Allows Deduction for Payments for Preferred Stock Used to Settle Bank’s Lawsuits
In a private letter ruling, the IRS’ Office of Chief Counsel allowed a private bank catering to high-wealth individuals to deduct as ordinary and necessary trade or business expenses the payments it made to settle lawsuits arising from criminally fraudulent activities by one of the bank’s fund managers.
Deductibility of Forbearance Payments
In Media Space, Inc., the Tax Court held that a corporation’s payments to its shareholders to delay redemption of their preferred shares were generally deductible under Sec. 162. However, the court further held that a company would be required to capitalize forbearance agreement payments under the 12-month rule in Regs. Sec. 1.263(a)-4(f)(1) if there was a reasonable expectancy of the agreement’s renewal.
Significant Recent Corporate Developments
This article summarizes selected recent developments in federal income taxation of corporations and shareholders.
Payments Under Forbearance Agreements Held Partially Deductible
The Tax Court held that payments by a company to investors for agreeing to temporarily forgo making an election to redeem stock were not interest payments; however, it further held that some of the payments were deductible ordinary and necessary business expenses.
Deepwater Horizon and Sec. 162
This item examines the deductibility of fines and penalties incurred by BP in the Deepwater Horizon explosion.
Hypothetical Independent Investor Test Tips the Scale in a Reasonable Compensation Case
This item examines the Tax Court’s focus on five factors in determining the reasonableness of a company’s sole shareholder’s compensation in the recent Multi-Pak Corp. decision.
IRS Revises Sec. 179 Expensing Amounts to Reflect HIRE Act Changes
On June 1, the IRS issued revised inflation-adjusted numbers to reflect the extension of the increased Sec. 179 expensing amount for 2010 (Rev. Proc. 2010-24).
Allocations of Sec. 179D Deductions by Government Building Owners
To meet new emissions reduction targets, federal agencies are likely to continue including more requirements in contracting protocols throughout the government’s supply chain. While these energy-efficiency targets create opportunities for designers under Sec. 179D, they can also create challenges for suppliers and others contracting with the government when determining who has the authority to allocate these tax benefits.
Sec. 199: Domestic Production Activities Deduction
Since 2004, Sec. 199 has allowed as a deduction a percentage of qualifying production expenses, with “production” defined broadly and requiring only that it take place “in significant part” within the United States.
Transaction Cost Update
This item discusses recent taxpayer-favorable guidance provided by the IRS and the Tax Court on the tax treatment of transaction costs.
The Proper Timing of Workers’ Compensation Deductions
For companies with more than a de minimis amount in their workers’ compensation reserve, it may be worthwhile to review the details underlying the reserve amount.
Sec. 199 Deduction and Government Contractors
Although the domestic production activities deduction (DPAD) came into law in 2004, certain types of taxpayers eligible for the deduction–including contractors doing business with the federal government–often fail to claim it on their income tax returns.
Treatment of Prior-Period Expenses under Sec. 199
Taxpayers that are eligible for the domestic production activities deduction under Sec. 199 often face the difficult question of how to properly allocate prior-period expenses between activities that created domestic production gross receipts (DPGR) and activities that did not create DPGR (non-DPGR).
Charitable Contribution of Qualified Conservation Easement
The Tax Court held that a conservation easement of air space over an historic structure that was donated by a taxpayer to a nonprofit organization did not meet the requirements to be considered a qualified conservation easement.
Sec. 162(m)(5) Implications for TARP Recipients
The Emergency Economic Stabilization Act created Sec. 162(m)(5) to impose strict limitations on the deductibility of certain executive remuneration.
Merger Termination Fee Deductible
The Tax Court held that a termination fee paid by the taxpayer to cancel a merger agreement in order to consummate a more lucrative merger was deductible.
Using Statistical Sampling to Support the Sec. 199 Deduction
As the Sec. 199 deduction percentages are phased in to the full 9% for tax years beginning in 2010, taxpayers will be faced with greater opportunities to maximize their Sec. 199 deductions and increase compliance risk.
Sec. 199 Issues Arising from Contract Manufacturing Arrangements
In order to determine whether the taxpayer or the contract manufacturer is entitled to the Sec. 199 deduction for the same manufacturing activity, the Sec. 199 rules require an analysis of which party in a contract manufacturing relationship has the “benefits and burdens of ownership” under judicially developed federal income tax principles.
Seventh Circuit Finds $20 Million Bonus Reasonable
The Seventh Circuit has reversed a Tax Court decision holding that most of an executive’s $20 million compensation was unreasonable and therefore a nondeductible dividend.
employee benefits & pensions
Profits interests: The most tax-efficient equity grant to employees
By granting them a profits interest, entities taxed as partnerships can reward employees with equity. Mistakes, however, could cause challenges from taxing authorities.
