Daily Tax Update - December 11, 2009

TAX COURT RULES AGAINST IRS IN VERITAS CASE:  The Tax Court yesterday released an important opinion by Judge Foley in the transfer pricing case of Veritas Software Corp. v. Commissioner. This opinion represents the first time that a court has addressed squarely the key issues that have been surrounding “cost sharing buy-ins” for many years. In Veritas, the taxpayer argued that the IRS could require a “buy-in” based only on the value of pre-existing intangibles at the time they are contributed to a cost-sharing pool, and the IRS argued that the amount of the buy-in should take into account income to be derived from future further development of the intangible under the cost-sharing agreement. The result was a resounding win for the taxpayer; with minor adjustments, the court upheld the taxpayer’s valuation based on “CUT” royalty rates and a rampdown in the buy-in over a period of several years (thus rejecting IRS arguments that the intangible “bought into” had unlimited life). The language used by the court in describing perceived shortcomings in the IRS analysis was relatively strong. If this opinion stands, it is likely to represent a severe blow to IRS assertions that taxpayers have been drastically undervaluing buy-ins under cost-sharing arrangements. The case is appealable to the 9th Circuit; Judge Foley is the same Tax Court judge whom the 9th Circuit recently overruled in another notable transfer pricing case, Xilinx v. Commissioner.  

MISCELLANEOUS GUIDANCE RELEASED TODAY:

Notice 2009-97 extends the December 31, 2009 deadline for amending qualified retirement plans to meet certain requirements of the Internal Revenue Code that were added by the Pension Protection Act of 2006 (PPA ’06), Pub. L. 109-280, and subsequently modified by the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Pub. L. 110-458. The extension applies only to the deadline for amendments to defined benefit plans to reflect the requirements of Code section 436 (limits on plan benefits in the event of underfunding), and the vesting and other special rules relating to cash balance plans, and to the deadline for defined contribution plans to meet the requirements of section 401(a)(35) of the Code relating to diversification requirements. The deadline is extended to the last day of the first plan year that begins on or after January 1, 2010.

Notice 2009-98 sets forth a list of changes referred to in Rev. Proc. 2007-44, 2007-2 C.B. 54, pertaining to the statutory, regulatory, and guidance changes needed for certain requests to the Service for opinion, advisory, and determination letters for the 12-month period beginning February 1, 2010.   

Notice 2009-92 provides that a delay or acceleration of the payment of nonqualified deferred compensation in order to comply with an advisory opinion issued by the Office of the Special Master for TARP Executive Compensation, pursuant to the Emergency Economic Stabilization Act of 2008 and regulations thereunder, including conditioning payment on satisfaction of a requirement related to the Troubled Asset Relief Program (TARP), such as repayment of the financial assistance granted under TARP, will not cause the plan to fail to meet the requirements of § 409A. Notice 2009-92 will appear in IRB 2009-52, dated Dec. 28, 2009.  

TAX BILLS INTRODUCED DECEMBER 10th:

H.R.4270: To amend the Internal Revenue Code of 1986 to make permanent certain temporary provisions, including the sales tax deduction, the child credit, the repeal of the estate tax, the deduction for higher education expenses, and extending the current capital gains and dividend tax rates.
Sponsor: Rep Frelinghuysen, Rodney P. [NJ-11] (introduced 12/10/2009) Cosponsors (None)

H.R.4278: To amend the Internal Revenue Code of 1986 to provide a reduced rate of excise tax on beer produced domestically by certain small producers.
Sponsor: Rep Neal, Richard E. [MA-2] (introduced 12/10/2009) Cosponsors (7)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.