AICPA Tax Division Comments

on the

2006-2007 Guidance Priority List (Notice 2006-36)

May 31, 2006

Corporations and Shareholders Taxation Technical Resource Panel (Andrew Cordonnier, Chair, (202) 521-1502, ; or George L. White, AICPA Staff Liaison, (202) 434-9268, ) NOTE: Comments are listed in priority order.

  1. Guidance is needed under section 362(e), including its application in consolidation, its interaction with consolidated regulations (e.g., Treas. Reg. section 1.1502-35T), and its application to transactions in which both section 351 and another nonrecognition provisions apply.
  1. Guidance is needed on the application of section 382, including—

§  The application of sections 382(l)(5) and (6) to consolidated groups;

§  The scope of, and exceptions to, section 382(l)(1); and

§  The application of section 382(h)(6) and/or clarification of the application of Notice 2003-65.

  1. Guidance is needed regarding the treatment of capitalized transaction costs (Notice 2004-18).
  1. Guidance is needed under section 355, including—

§  Satisfaction of business expansion under section 355(b) through stock and asset acquisitions; and

§  Regulations regarding predecessors and successors under section 355(e).

  1. Guidance is needed to conform the diversification standards of section 351(e) to those of section 368(a)(2)(F).
  1. Final Regulations should be issued under section 1502 regarding liquidations under section 332 into multiple members.
  1. Final Regulations should be issued under section 368(a)(1)(F), relating to a mere change in identity, form, or place of organization of one corporation,

Employee Benefits Taxation Technical Resource Panel (Sandy Wheeler, Chair, (202) 4141856, ; or Lisa A. Winton, AICPA Staff Liaison, (202) 434-9234, ) NOTE: Comments are listed in priority order.

1. Guidance is needed on the use of electronic technology for delivery of safe harbor 401(k) plan notices, qualified joint and survivor annuity/qualified pre-retirement survivor annuity (QJSA/QPSA) notices and waivers, spousal consents under Section 417, and ERISA 204(h) notices.

2. Guidance is needed on how to qualify for self-correction when moving from a document of one service provider to another service provider and changes were unintentionally made to the document during this process. Operational inconsistencies need to be addressed.

3. Guidance is needed on 401(k)/(m) testing for mergers and acquisitions occurring during a plan year; application of the “same desk” rule to non-corporate plan sponsors; and clarification of the successor employer and severance of employment concepts.

4. Final regulations are needed on the 408(q) requirement to establish a separate trust for the deemed IRA contributions.

5. Guidance is needed from the final 401(k) plan regulations regarding timing of amendments when switching from prior to current year testing.

Individual Taxation Technical Resource Panel (Lorraine D. Evans, (916) 563-7138, ; or Lisa A. Winton, AICPA Technical Manager, (202) 434-9234, ) NOTE: Comments are listed in priority order.

1. Guidance is needed on the interrelationship of sections 121 and 469 when a rental property that is converted into a personal residence is disposed of without recognizing gain.

2. Guidance is needed on using deferred vacation home losses to offset gains on the sale of the vacation property under section 280A. Section 280A limits the current deductibility of expenses associated with vacation home rentals; excess deductions may be carried over to succeeding years. Guidance must resolve the question of whether gain from the sale of the vacation property is considered gross rental income that would allow the excess deductions to be taken in the year of the sale.

3. Guidance is needed on the interaction of the regular and alternative minimum taxes on the disposition of “incentive stock option” stock which results in capital loss for AMT purposes and capital gain for regular tax purposes. (A basis adjustment on disposition would be a more appropriate result than an AMT capital loss carryforward.)

4. Guidance is needed to assist taxpayers in distinguishing between filing status as an investor vs. treatment as a trader.

5. Guidance is needed regarding the proper handling of exclusion of gain on personal residence as part of installment sale.

6. Guidance is needed relating to the coordination of a tuition payment and the receipt of a distribution from a 529 Plan. Specifically, if a taxpayer makes a tuition payment in 9/06, but receives the 529 distribution in 1/07, assuming no other tuition payments are made, is the 2007 distribution taxable? IRC section 529(c)(3) does not address the question, however IRS Publication 970 states that the tuition payment and the distribution must be in the same year.

International Taxation Technical Resource Panel (Kenneth Wood, Chair, (202) 327-8018, ; or Eileen R. Sherr, AICPA Technical Manager, (202) 434-9256, ) NOTE: Under each numbered category, the first three bulleted items are the most important.

1.  Guidance is needed in the following areas related to Subpart F/Deferral:

§  Address whether previously taxed income is a corporate-level or shareholder-level attribute in (1) the section 959 successor-in-interest regulations, and (2) the reserved portions of the proposed section 367(b) regulations.

§  Provide regulations under section 954(h) on the subpart F exception for active financial services income, especially with regard to the application of the substantial activity requirement of section 954(h)(3)(C) and the “substantially all the activities” requirement of section 954(h)(3)(A)(ii).

§  Provide regulations under section 954(c) relating to the active rent or royalty exception. Also, consistent with the legislative history of the 2004 American Jobs Creation Act and Notice 2006-48, issue regulations providing exceptions from income inclusions under section 956 and 367(a) for aircraft and vessel leasing that is compliant with section 954(c)(2)(A).

§  Finalize the proposed section 898 regulations on conforming year-ends of certain foreign corporations to the year-ends of their U.S. shareholders.

§  Provide guidance to: (1) explain the application of section 304(b)(5), and (2) implement section 304(b)(6) (regarding the avoidance of multiple inclusions in cross-border section 304 transactions).

§  Provide more complete and definitive guidance under the PFIC regulations. In particular, (1) update the PFIC regulations to take into account the enactment of section 1297(e), which eliminates the overlap of the PFIC and Subpart F regimes under certain circumstances, (2) provide guidance under section 1297(c) regarding the 25 percent ownership look-through rule and its interaction with the section 1297(b)(2)(C) related party income rules, and (3) provide guidance on the application of section 1297(b)(1)’s definition of passive income and in particular on the interaction of section 954(h) and (i) with section 1297(b)(2).

§  Regulations under section 961(c) regarding basis adjustments to the stock of a CFC held by another CFC, including stock held through partnerships.

2. Guidance is needed in the following areas related to inbound transactions:

§  Reissue proposed section 163(j) “earnings stripping” regulations, taking into account taxpayer comments and developments over the past decade.

§  Provide guidance under section 267(a)(3)(B) regarding the timing of deduction for payments to CFCs and PFICs and provide exceptions for appropriate transactions.

§  Provide guidance on the interaction of sections 897(h)(1) and (h)(2) for direct holders of REITs and whether distributions in liquidation of a REIT are covered by section 897(h)(1) or instead section 897(h)(2).

§  Provide guidance on the application of Temp. Reg. section 1.897-6T and section 1445 to nonrecognition transactions involving transfers of USRPIs to partnerships, and dispositions of interests in partnerships that directly and indirectly hold USRPIs.

§  Provide guidance regarding new Form 8804, particularly whether a partnership that must withhold under section 1446 with respect to effectively connected taxable income allocable to foreign partners is entitled to take into account otherwise allowable deductions in the relevant taxable income computations.

3. Guidance is needed in the following areas related to outbound transactions:

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§  Finalize guidance on the treatment of triggered gain recognition agreements (GRA) under section 367(a) including treatment of foreign transferors and foreign transferees upon a section 355 distribution and the application of the substantially all the assets test; issue section 367(a)(5) regulations. [Note: See AICPA comments to IRS on Notice 2005-74, Section 3.02 regarding the effect of certain exchanges on gain recognition agreements under section 367(a) submitted on February 21, 2006, available at: http://tax.aicpa.org/Resources/International/Regulation+and+Administration/AICPA+Comments+on+Notice+2005-74+on+the+Effect+of+Exchanges+on+Gain+Recognition+Agreements.htm]

§  Issue guidance on the application of new section 7874 relating to inversion transactions, including the following issues: (1) the determination of whether there has been a direct or indirect acquisition of substantially all the properties; (2) the requirement that such acquisition be pursuant to a plan or a series of related transactions; (3) the requirement, in the ownership percentage test, that ownership of stock be by reason of holding an interest in the domestic corporation or partnership; (4) the treatment of stock sold in a public offering that is related to the acquisition; (5) the requirement that the group's activities in the relevant foreign country are insubstantial when compared to the group's total business activities; (6) whether and to what extent options on stock and other similar interests are treated as stock for the purpose of determining whether a corporation is a surrogate foreign corporation

§  Issue guidance under section 1248 regarding (1) dispositions of certain foreign corporations by foreign partnerships with U.S. partners and (2) dispositions by U.S. persons of foreign partnership interests where the foreign partnership owns stock in a controlled foreign corporation and the U.S. partner is a United States shareholder with respect to the controlled foreign corporation.

§  Issue updated regulations under section 367(d), reflecting changes to the statute since their original issuance. We also suggest interim guidance be issued on the changes to section 367(d) under section 406(a) of the American Jobs Creation Act of 2004, including the retroactive application of that provision.

§  Issue guidance under new section 332(d) regarding its interaction with section 337.

§  Issue new proposed section 987 regulations relating to foreign currency translation gains and losses with respect to branch transactions (taking into account public comments with respect to Notice 2000-20). [Note: See AICPA comments to IRS on this submitted on August 20, 2003, available at: http://tax.aicpa.org/Resources/International/Regulation+and+Administration/AICPA+Comments+on+Foreign+Currency+Transaction+Regulations.htm]

§  Issue guidance under section 1248(f)(2) addressing certain distributions of stock of foreign corporations to domestic corporations.

§  Issue guidance relating to the carryover of tax attributes in certain reorganizations and section 355 transactions. The IRS has issued proposed regulations under section 367(b) addressing these issues (e.g., Treas. Reg. sections 1.367(b)-3,-7,-8 and -9). These rules also would apply to a foreign corporation that engages in an inbound asset reorganization or inbound section 332 liquidation.

4. Guidance is needed regarding foreign tax credits, in particular:

§  Issue guidance on recharacterization of overall domestic losses under section 904(g).

§  The section 904(f) regulations relating to overall foreign losses should be revised to replace the outdated 1987 regulations and Notice 89-3.

§  Issue guidance under new section 904(f)(3)(D), relating to the application of the overall foreign loss rules to certain dispositions of CFC stock, and, in particular, section 368(a)(1)(B) reorganizations, as well as relating to the provision’s interaction with section 355.

§  Amend the regulations under section 853 to eliminate separate company reporting of the foreign tax credit for mutual funds. In addition, modify Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) to indicate that distributions from regulated investment companies are exempt from per-country reporting. [Note: See AICPA comments to IRS on this submitted on February 26, 2003, available at: http://tax.aicpa.org/Resources/International/Regulation+and+Administration/AICPA+Recommends+Simplifying+Foreign+Tax+Credit+Reporting+for+Mutual+Funds.htm]

§  Guidance is needed under section 905(c) regarding taxes paid after a liquidation, stock sale or section 338 election.

§  More complete guidance regarding the application of Treas. Reg. section 1.865-1(a)(2) and Treas. Reg. section 1.865-2(a)(3) under which losses are allocated to reduce foreign source income if gain on the sale of the property (including stock) would have been taxable by a foreign country and the highest marginal rate of tax imposed on such gains in the foreign country is at least 10%.

5. Guidance is needed in the following additional areas:

§  Guidance on the international tax provisions in the Tax Increase Prevention and Reconciliation Act of 2005.

§  Reissue proposed regulations under section 482 reflecting the numerous taxpayer comments and issues raised regarding the simplified cost-based method and other proposed rules governing the arm’s length value of intercompany services.

§  Clarify and relax the double reporting rules under the section 1461 regulations and the treaty-based reporting requirements under section 6114.

IRS Practice and Procedures Committee (James E. Brennan, Chair, (212) 773-3209, ; or Benson S. Goldstein, AICPA Technical Manager, (202) 434-9279, ) NOTE: Comments are listed in priority order.

1.  On February 28, 2003, Treasury released final regulations designed to address “abusive tax avoidance transactions” and disclosure, registration, and list-keeping under sections 6011, 6111, and 6112. On January 6, 2006, Treasury released Notice 2006-6, removing the book-tax difference category of reportable transactions. Treasury should clarify the effective dates in Notice 2006-6 to remove any anomalies and continue to update the guidance involving the regulations, including the remaining five categories of reportable transactions described in the regulations. Further, Treasury should provide guidance on the following penalties.

§  Section 6111(b)(1) defines a “material advisor” as any person who provides “material aid, assistance, or advice” with respect to “organizing, managing, promoting, selling, implementing, insuring, or carrying out” a reportable transaction. Notice 2004-80 provides interim rules implementing the requirements of section 6111 until the Secretary prescribes regulations. In addition, Treasury has released Notice 2005-22, which clarifies and modifies Notice 2004-80 by providing additional guidance for “material advisors.” Despite the release of Notices 2004-80 and 2005-22, further guidance is necessary to clarify the scope of the “material advisor” rules.

§  Sections 6662-6664 describe the circumstances when accuracy-related and fraud penalties would be imposed on underpayments, including underpayments with respect to reportable transactions. For non-corporate taxpayers involved in any reportable transaction, the accuracy-related penalty may be waived for reasonable cause, but only under certain (varying and limited) circumstances. Guidance is necessary with respect to reasonable cause under sections 6662-6664, particularly with respect to reasonable cause for a substantial understatement of income tax penalty under consideration by the Service against a non-corporate taxpayer.