Many taxpayers may have noticed a recent increased IRS focus on R&E expenditures. As a result of this increased focus, it is time for taxpayers to increase their focus as well.
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TOPICS / CORPORATIONS
Deductions
Exercise of Stock Options Results in Taxable Income and Compensation Deduction
The IRS held that a taxpayer’s cashless exercise of stock options resulted in taxable income to the taxpayer and a compensation deduction for the company that issued the options.
Guidance on Characterizing Gross Receipts from Telecommunications Services
In Rev. Rul. 2011-24, the IRS provided guidance for determining whether a taxpayer that provides telecommunications services derives gross receipts from services, leasing or renting property, or a combination of the two, for purposes of the domestic production activities deduction under Sec. 199.
Final Regs. Govern Election to Deduct Business Start-up Expenses
The IRS issued final regulations (T.D. 9542) governing elections by individual taxpayers, corporations, and partnerships to deduct start-up expenses or organizational expenditures.
Transaction Cost Considerations: Rev. Proc. 2011-29 and Other Related Matters
To eliminate the controversy over the allocation of success-based fees and corresponding documentation requirements, Rev. Proc. 2011-29 povides a safe-harbor election for allocating 70% of success-based fees paid or incurred in a covered transaction to activities that do not facilitate the transaction.
Election to Deduct Business Startup Expenses Gets Final Rules
The IRS issued final regulations governing elections by individual taxpayers, corporations and partnerships to deduct startup expenses or organizational expenditures.
Ordinary Worthless Stock Deductions: Characterizing Subsidiary Receipts
An ordinary loss deduction for worthless stock of an affiliated operating subsidiary generally is permitted as long as more than 90% of the subsidiary’s gross receipts are from active operating income. This item discusses the difficulty of determining whether a subsidiary’s gross receipts qualify as active operating income for this purpose under various circumstances.
Bank Allowed to Deduct Lawsuit Settlement Payments
In a private letter ruling, the IRS allowed a private bank catering to high-wealth individuals to deduct payments it made to settle lawsuits arising from criminally fraudulent activities by one of the bank’s fund managers.
Engagement Letter Fairness Opinion Fee Language May Affect Fees’ Taxation
Language used in investment banker (IB) engagement letters to implement fee payment arrangements can significantly affect the federal income tax treatment of such payments.
Tax Consequences of Transaction Costs
This article discusses the tax consequences of transaction costs in four settings: in general, when acquiring or producing tangible assets, when acquiring or creating intangible assets, and when acquiring a business.
Violation of Public Policy and the Denial of Deductions
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.
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.
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