TREASURY, IRS ANNOUNCE PROPOSED COST-SHARING REGS: The U.S. Treasury Department and the Internal Revenue Service announced proposed regulations that provide further guidance to Section 482, which determines taxable income in connection with cost-sharing arrangements affecting intellectual property.The changes could mean a big difference to the bottom lines of companies in the pharmaceutical and software industries, whose main asset is their intellectual property.
According to a release from the agencies, the section has occasionally been abused since Congress amended the regulations in 1986. At that time, Congress indicated that it did not intend to prevent the use of actual research and development cost-sharing arrangements, but expected the results of those arrangements to be consistent with the matching income standard.
The regulations would limit cost-sharing arrangements that allow companies to undervalue patents, licenses, trademarks and other intellectual property when they are transferred to a subsidiary from a parent company. Treasury rules require companies to value intellectual property at the same price that they would charge a competitor to acquire them.
The agencies said that the proposed regulations require any cost-sharing arrangements to produce results consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. Both agencies welcome comments on the proposed changes. The regulations and transition rules can be found at www.treas.gov.
MINNESOTA OFFERS AN OUT FOR TAX SHELTER ABUSERS: Minnesota's Department of Revenue will give residents who have used abusive tax shelters until Jan. 31 to amend their tax returns without facing new penalties passed during the 2005 special legislative session.
Under the voluntary compliance program, taxpayers can escape the newly created penalties, which authorize the department to assess stiff punishment on taxpayers who participate in, or promote, tax avoidance schemes. After the six-month window of opportunity, the department will officially step up enforcement efforts in the area.
According to the state, similar compliance programs have been successfully conducted in other states, including California and Illinois. Minnesota expects the program to generate $57 million in additional tax revenue during 2006 and 2007.
The Internal Revenue Service has determined the types of transactions and shelters that are potentially abusive. Taxpayers must disclose their participation in these transactions and amend their state returns or face substantial penalties, including nondisclosure penalties as high as $100,000 for individuals and $200,000 for businesses.
To participate in the compliance initiative, taxpayers must complete Form VCI, Voluntary Compliance Initiative Agreement, amend their state tax returns, and pay any additional tax and interest due. Information on the new legislation and the voluntary compliance program is available online at www.taxes.state.mn.us.
STUDY says IRS MAY BE WASTING MILLIONS ON TRAINING: Studies conducted by the Treasury Inspector General for Tax Administration over the past two tax filing seasons criticize the Internal Revenue Service's use of training programs. The report came out of the Government Accountability Office in mid-August, having been requested by two Democrats - Senate Finance Committee member Max Baucus, of Montana, and Sen. Byron Dorgan, of North Dakota. Both Baucus and Dorgan questioned whether the IRS knows if the new training programs are helping.
"The IRS cannot keep blindly throwing money at training without seeing the results," said Baucus, in a statement.
The report suggests that the IRS could be wasting millions of dollars on ineffective employee-training programs to assist taxpayers over the phone and at the agency's Taxpayer Assistance Centers. Although the IRS cannot separate the costs of training tax law assistors from other assistance staff, the thousands of staff devoted to providing tax law assistance receive training each year, and the report says that they could benefit from a more centralized system. The report also said that the IRS did not have data on what is likely the largest cost component - the value of staff time devoted to tax law training. The full report is available at www.gao.gov/new.items/d05782.pdf.
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