SURPRISE! NEW FBAR EXPANDS OFFSHORE ACCOUNT REPORTING

There are three certainties in life - death, taxes, and increases in U.S. information reporting requirements. In compliance with the third of these certainties, the U.S. Treasury Department has issued a new FBAR form that expands reporting of foreign accounts beyond those previously required.

The Form TD F 90-22.1 (known as the "FBAR") is a reporting form required of U.S. persons that have interests in non-U.S. accounts. It is a Treasury Department form, not an IRS form. It is not filed with a tax return, but is due on a different day and location than income tax returns. The Form is problematic, since many persons that are required to file it do not know about it, and the penalties for noncompliance can be severe. The extension of the reporting requirements will only exacerbate these problems.

Some of the expansions in reporting include the inclusion of interests in foreign mutual funds, and the inclusion of reporting by foreign entities (such as the extension of reporting to U.S. unincorporated branches of foreign entities).

The new Form must be used after 12/31/08. Click on the following link to view a summary of who is subject to the reporting requirements under the instructions to the new Form - http://tinyurl.com/3es5jx.

A copy of the Form and instructions is available at http://www.irs.gov/pub/irs-pdf/f90221.pdf.

TAX CHANGES ENACTED AS PART OF THE BAILOUT LAW

The bailout law passed by Congress included a number of tax provisions - some related to the bailout and some not. Some of the principal changes include:

a. Compensation Deductions Limited. The new law limits to $500,000 the compensation deduction for pay of principal officers of employers who have assets acquired by the federal government that meet the thresholds including in the new law. The golden parachute nondeduction rules and the excise tax on golden parachute payments are also being expanded to include golden parachutes to such employers.

b. Mortgage Debt Forgiveness Relief Extended. The exclusion from gross income for up to $2 million of mortgage debt relief has been extended for 3 more years.

c. Alternative Minimum Tax Relief. AMT exemption amounts are increased, but only for 2008. Absent further legislative changes, in 2009 the exemptions will return to 2000 levels.

d. Various Tax Provisions are Extended. The deduction for state and local sales taxes has been retroactively extended through 2009. Also extended is the above-the-line deduction for higher education expenses and educator expenses, the additional standard deduction for state and local property taxes, the allowance of nontaxable transfer of IRAs to charities has been extended two years, the research credit has been extended and modified, the tax credit for new markets has been extended one year, the Subpart F extension for active financing income has been extended for one year, and various charitable deduction enhancements have been extended, along with many other narrowly focused extensions.

IRS TO EASE LOSS CARRYOVER RESTRICTIONS

Code Section 382 limits trafficking in net operating losses by imposing restrictions on use of net operating losses of a corporation after a substantial change in ownership. One of the restrictions that arises after such a change in ownership is that the available net operating losses are effectively written down to the fair market value of the corporation at the time of change in ownership.

Given such restrictions, taxpayers are encouraged to make capital contributions to a loss corporation before a change in ownership to beef up its value and thus reduce the write-down of its NOLs. To restrict this gamesmanship, Code Section 382(l)(1)(A) will disregard any capital contribution received by a loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under Code Section 382. Code Section 382(l)(1)(B) then goes on to provide that any capital contributions made during the two years leading up to the change in ownership will be presumed to be part of such a plan and disregarded, except as provided in regulations.

Surprisingly, the IRS has indicated that regulations will be issued that will not provide for a per se presumption of a plan to avoid Code Section 382limitations for contributions in the two years leading up to the change in ownership. Instead, it will apply a facts and circumstances analysis to determine if there was a plan to avoid the Code Section 382 limitations. Further, the regulations will have certain safe harbor capital contribution situations that will not give rise to a finding of a plan to avoid the limitations.

These safe harbor capital contributions are:

(1) The contribution is made by a person who is neither a controlling shareholder (determined immediately before the contribution) nor a related party, no more than 20% of the total value of the loss corporation's outstanding stock is issued in connection with the contribution, there was no agreement, understanding, arrangement, or substantial negotiations at the time of the contribution regarding a transaction that would result in an ownership change, and the ownership change occurs more than six months after the contribution.

(2) The contribution is made by a related party but no more than 10% of the total value of the loss corporation's stock is issued in connection with the contribution, or the contribution is made by a person other than a related party, and in either case there was no agreement, understanding, arrangement, or substantial negotiations at the time of the contribution regarding a transaction that would result in an ownership change, and the ownership change occurs more than one year after the contribution.

(3) The contribution is made in exchange for stock issued in connection with the performance of services, or stock acquired by a retirement plan, under the terms and conditions of certain regulations under Code Section 355.

(4) The contribution is received on the formation of a loss corporation (not accompanied by the incorporation of assets with a net unrealized built in loss) or it is received before the first year from which there is a carryforward of a net operating loss, capital loss, excess credit, or excess foreign taxes (or in which a net unrealized built-in loss arose).

The inclusion of practical safe harbors is always welcome!

Notice 2008-78