Tax Tactics – October 2014
Tax Tips
Get on the Fast Track
The IRS has expanded its Fast Track Settlement (FTS) program to small businesses and self-employed individuals. The program, previously available only to businesses with more than $10 million in assets, streamlines the dispute resolution process by using mediation rather than litigation or other formal proceedings. The goal is to complete cases within 60 days. If you’re involved in a dispute with the IRS, ask your tax advisor about applying for FTS.
Rescission Doctrine and Real Estate Reconveyance
In IRS Revenue Ruling 80-58, a seller of real estate had agreed to accept reconveyance of the property and return the buyer’s funds if the buyer couldn’t get the property rezoned for business purposes within a specified period. Applying the “rescission doctrine,” the IRS ruled that a seller need not recognize taxable gain if the transaction is rescinded during the same tax year as the original sale and the parties are returned to their original positions.
But if the rescission occurs in a later year, the seller must recognize gain in the year of sale. When the property is reconveyed, the seller acquires a new basis, equal to the funds paid to the buyer.
In private letter rulings (PLRs) over the years, the IRS appeared to be expanding the rescission doctrine, but in a 2012 Revenue Procedure, it announced that it would no longer issue PLRs on the subject. Until there’s guidance on this issue, apply the rescission doctrine conservatively and follow Rev. Rul. 80-58 to the letter.
Contract Work: Who Claims the Manufacturers’ Deduction?
The manufacturers’ deduction (also commonly referred to as the domestic production activities deduction or the Section 199 deduction) allows many businesses to deduct as much as 9% of their income from qualified production activities, including manufacturing, construction, architecture and engineering, and software development.
But what if a business contracts with third parties to perform these activities? Which party claims the deduction? The U.S. Tax Court addressed this issue in Advo, Inc. v. Commissioner, a case involving a contract manufacturing arrangement.
Identifying the party entitled to claim the deduction is complex, but essentially it boils down to which party has the benefits and burdens of ownership. To make this determination, the court looks at several factors, including who holds legal title to property during production, who has control over the property and the process, who pays property taxes, who bears the risk of loss or damage, and who receives profits from the property’s sale.
Businesses involved in contract production agreements should review their arrangements carefully to ensure that they obtain the desired tax treatment.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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