I am a tax protestor. Lets talk

[juiceman]

First off, I'm not really a tax protestor, but I figured this title may garner more attention. I am a former businessman turned writer. And yes, as you can tell by the elegance of my words thus far, I am a phenom. I'm that good.

*that was a joke*

But back to seriousness...

I stumbled across this board while researching information on tax protestors and found many links to this board. I was astonished to find such a pro-establishment website in existence, and I feel it my duty to engage you in logical and legal debate regarding the tax protestor movement.

Like I said, I myself, and not a tax protestor. For a simple answer why? I am afraid.
I am however currently under a three year audit for an offshore bank account that I never even had. And I can tell you, I am not happy about it.

So it seems this board is infested with lawyers, judges, and God knows who else. You all seem to hold a whimsical disdain for the tax protestor movement, including the (what I would call) brave men and women who have taken up the challenge of facing the government head on at their own game - and won.

But enough general background and ranting, lets actually dive into a topic. I won't rehash any of the cliche 16th, 5th, or 9th amendment arguments, lets hop onto something new.

-------------------------------------------------------
From msnbc.com: http://www.msnbc.msn.com/id/27635885/

Quiet windfall for US banks

So while the entire nations eye was focused on the supposed "bailout" plan, ( I quote bailout because I'd still like to see in the end who will actually be getting bailed out) the treasury department met behind closed doors, held secret meetings, and whatyaknow, rewrote a statute of the corporate tax code.

Now, without even making an analogy to the fact that this underhanded change bears a striking resemblance to the passing of the 16th amendment (ooops, i just did) , I would like to know quatloos board members opinions on this?

From what I understand, the lawmakers of this country themselves are outraged at this. And of course, many tax attorneys have already deemed the change illegal. The Department of Treasury however, as I have been so lucky to learn first hand, ALWAYS claims to have the authority for any of the decisions it makes, even when they don't.

So how would any of you defend this behind-closed-doors change that is now going to increase corporations ability to buy worthless companies so that they may use their losses to lower their taxes, which of course widens the tax gap and shifts more of the burden to the private sector? You all seem to be so pro government, and yet the department of treasury has just committed an underhand tatic that members of this government say was illegal and wrong. Who do you defend here? And how can you honestly believe anything that comes from the mouthpiece of the IRS?

A thousand flaming arrows at your fingertips are probably lit and ready to launch at this point. So please indulge me, and fire away.

[Tax Man]

You all seem to be so pro government, and yet the department of treasury has just committed an underhand tatic that members of this government say was illegal and wrong.

So the same government that is bad is saying it was wrong.

Who do you defend here?

You mean the "bad" government or the "good" government?

And how can you honestly believe anything that comes from the mouthpiece of the IRS?

I don't sit there waiting for anyone in the IRS to say something I disagree with.

A thousand flaming arrows at your fingertips are probably lit and ready to launch at this point. So please indulge me, and fire away.

Not firing, just wondering what your point is.

[juiceman]

Well, I'm not sure about you personally, but several posters on this board seem to vigorously attack the tax protestor movement.

My point is: It is exactly these types of actions and tactics (the changing of the corporate statute behind closed doors) that tax protestor arguments thrive on. So to anyone who attacks tax protestor movements, how do you defend this move by the Department of Treasury?

Am I making myself clear?

Okay I'm off to bed, I look forward to speaking with any of you in the future who are truly interested in logically and legally debating some issues I would like more information on. Take care!

[Tax Man]

Well, I'm not sure about you personally, but several posters on this board seem to vigorously attack the tax protestor movement.

My point is: It is exactly these types of actions and tactics (the changing of the corporate statute behind closed doors) that tax protestor arguments thrive on. So to anyone who attacks tax protestor movements, how do you defend this move by the Department of Treasury?

Am I making myself clear?

Okay I'm off to bed, I look forward to speaking with any of you in the future who are truly interested in logically and legally debating some issues I would like more information on. Take care!

OK, I think I got it.

The economic bail-out plan, which, despite the fact that it happened "behind closed doors", is proof-positive that vast conspiracies actually do exist in the context of, for example, taxing income from sources without the United States. You know, the conspiracy that only the tax protestors know about, and Congress decided to hide...in the Code...in Treas. Reg. 1.861-8(f).

I think I see where youre going with this.

[RyanMcC]

So it seems this board is infested with lawyers, judges, and God knows who else. You all seem to hold a whimsical disdain for the tax protestor movement, including the (what I would call) brave men and women who have taken up the challenge of facing the government head on at their own game - and won.

Like who?

But enough general background and ranting, lets actually dive into a topic. I won't rehash any of the cliche 16th, 5th, or 9th amendment arguments, lets hop onto something new.

Good, because the government has the constitutional authority for an income tax even without the 16th amendment. You can fill out a tax return without incriminating yourself. I'm not sure how the 9th amendment could help any tax protester arguement.

[Famspear]

I stumbled across this board while researching information on tax protestors and found many links to this board. I was astonished to find such a pro-establishment website in existence . . .

I do not now work for, nor have I ever worked for, the government. I represent certain taxpayers in their dealings with the Internal Revenue Service. I have been studying tax protesters for years, and I have seen this tendency over and over -- the tendency of anti-government types (such as tax protesters) to believe that people who do not support the tax protesters' "views" about the tax law must be "pro-establishment." This illustrates part of the problem with the intellectual approach of tax protesters, who start with the proposition that taxation is bad, but then grasp desperately for an argument -- any argument, no matter how frivolous -- to support that proposition, to the point of embracing foolishness in the form of any nonsensical theory, whether it be "the Sixteenth Amendment was not properly ratified" to "spelling my name in all capital letters has some magical significance" or "income means only corporate profits" or "Form 1040 does not contain a valid OMB control number'', etc., etc., etc.

Like I said, I myself, and not a tax protestor. For a simple answer why? I am afraid.

That's interesting, but I would argue that from a moral or intellectual point of view, that is not the best reason for not being a tax protester. You should avoid "being" a tax protester -- and by that I mean you should avoid believing tax protester nonsense -- because it is just that: nonsense.

I am however currently under a three year audit for an offshore bank account that I never even had. And I can tell you, I am not happy about it.

Well, I would caution you not to let your personal experience impair your perception of reality. This forum is about people who are essentially criminals and scam artists -- people who raise nonsensical, legally frivolous arguments about the nature of the tax law (U.S. federal income tax, mainly). Not merely arguments that have no legal merit -- but instead arguments that are so stupid that in some cases the law itself may impose penalties for even using those arguments in a tax return or in a court of law.

So it seems this board is infested with lawyers, judges, and God knows who else. You all seem to hold a whimsical disdain for the tax protestor movement, including the (what I would call) brave men and women who have taken up the challenge of facing the government head on at their own game - and won.

No, the people to whom you refer are not "brave" in the connotative sense in which I would use the term. The people who have "taken up the challenge of facing the government head on at their own game" are crooks. Criminals, Shysters. People with psychological problems. And, not one of them has ever won a tax protester argument in a court of law. Never. Not even once. A few have won acquittals in criminal tax cases, but none (so far) has ever won a court ruling that any tax protester argument has any legal validity whatsoever.

Welcome to reality.

And my disdain for tax protesters is not merely "whimsical." I have the same disdain for tax protesters that I would have for scammers of any other type. My disdain for tax protesters is well-founded. Tax protesters are dishonest, and they are low-life crooks (to the extent that they actually break the law using their tax protester arguments). It is not against the law to believe in tax protester nonsense. It is against the law to willfully file a federal income tax return underreporting tax liability using a tax protester argument, etc., etc., and people who do that are criminals. They don't deserve to call themselves "brave" or "patriots". They're crooks, and I hope they get what they deserve.

the treasury department met behind closed doors, held secret meetings, and whatyaknow, rewrote a statute of the corporate tax code.

Well, not exactly. The Treasury has come out with a pronouncement about how Internal Revenue Code section 382 (relating to the use of net operating loss carryovers by a corporation that has had certain changes in its ownership, etc.) can be used by entities involved in the bailout. There is a question, probably a legitimate question, as to whether the Treasury's proposed interpretation is correct. There is also some question as to how (or even whether) this interpretation can be challenged procedurally.

Now, without even making an analogy to the fact that this underhanded change bears a striking resemblance to the passing of the 16th amendment (ooops, i just did) , I would like to know quatloos board members opinions on this?

First, I don't think you know anything about the passing of the 16th Amendment (I'm saying this as a challenge to provoke you; obviously, you're aware of this tired, old argument, since you've mentioned it). I don't think you know anything about why tax protesters began making the frivolous argument that the Amendment was not properly ratified. I think you have been reading tax protester literature. Anyone who falls for the "16th Amendment was not properly ratified" garbage is illustrating his or her own motivation -- and it's not good. So, don't fall for that garbage.

Second, the problem of the Treasury's interpretation -- or misinterpretation - of section 382 has little to do with the problem of tax protesters. Let's assume for the sake of argument that the Treasury is wrong on its application of section 382 -- a distinct possibility. That does not change the fact that tax protesters are completely wrong about their interpretations of tax law.

The Department of Treasury however, as I have been so lucky to learn first hand, ALWAYS claims to have the authority for any of the decisions it makes, even when they don't.

No, that's not the problem. The problem is that tax protesters always claim to have found, in the law somewhere, the authority for any of the tax protester positions they take -- and they NEVER do have what they claim they have. Never. Not even once.

You all seem to be so pro government . . .

Oh? Why do we seem "pro government"??? Because we shoot down tax protester nonsense? How can we be "pro government" when we're working against the government by representing taxpayers AGAINST the government? And don't give me the tax protester rhetoric about evil lawyers and accountants.

Yes, some of us here work for the government, but others of us do not. But I'll tell you why I suspect we seem "pro government" to you, or at least why we seem, to tax protesters, to be "pro government": because some tax protesters equate anyone who points out the falseness of their positions as a "pro government" person. This is intellectual dishonesty on the part of tax protesters.

......and yet the department of treasury has just committed an underhand tatic [sic] that members of this government say was illegal and wrong. Who do you defend here? And how can you honestly believe anything that comes from the mouthpiece of the IRS?

Well, most of the things the IRS says about the tax law are correct -- and I can say that because I have studied the law myself, and I have been properly trained to do that, and I have concluded that the government is right on this point or that point. The mere fact that I recognize that the government is USUALLY right does not mean that I am biased in favor of the government, any more than I would be biased "against" the IRS merely because I represent taxpayers.

Just as importantly: The government does make mistakes in its interpretation of tax law, just like everybody else. That's why we have a court system to decide disputes between the tax collector and the taxpayer. Sometimes the tax collector wins; other times the taxpayer wins. If the government were always right, and if the government always won, I would be out of a job.

Which I am not.

Saying that the tax protesters are wrong on every single frivolous argument they make (which is a correct statement) is not the same as saying the government is right on its latest interpretation of section 382 with respect to the bailout. I don't know (yet) whether the government is right on this point, but a first glance at the statute does lead me to suspect that there just might be a problem with the government's position. Maybe a serious problem.

[Famspear]

By the way, the link to the article had expired before I got a chance to read the article. So, here's an editorial on the subject from the Houston Chronicle:

Behind closed doors
As Congress debated the bailout, Treasury officials quietly gave banks a tax break worth billions

[November 10, 2008]

When it comes to efforts by government to shore up the faltering financial system, what Congress sees is not necessarily what it gets.

In the case of the $700 billion bank bailout legislation, lawmakers were unaware that Treasury officials had already changed a tax code regulation that effectively provided up to $140 billion in reduced taxes for financial institutions.

First reported by the Washington Post, the changes in Section 382 of the tax code will facilitate mergers by allowing banks to write off the losses of entities they absorb, paying lower taxes as a result. Section 382 was enacted by Congress in 1986 to prevent companies from segregating their profits while setting up shell companies whose losses could provide tax breaks.

While the banking industry and conservative Republicans have been pushing for years to gut the statute, Congress had refused to consider changes. But Treasury officials with the stroke of a pen provided the troubled financial industry with a massive infusion of aid without even consulting lawmakers. According to the Post, more than a dozen tax lawyers opined that the Treasury crew had overstepped their authority in changing the tax rules.

Treasury spokesman Andrew C. DeSouza defended the rule change, claiming that the administration has the authority to interpret tax regulations. Since Congress clearly meant to prevent the misuse of tax shelters, the new administration interpretation is the financial equivalent of declaring that night is day and day is night.

Senator Charles Grassley, R-Iowa, the ranking minority member of the Senate Finance Committee, was particularly critical of Treasury's action. Because of the sensitivity of the current financial crisis, congressional leaders have been wary of openly labeling the rule change illegal.

It is essential that the American people have confidence that the massive amounts of taxpayer dollars going to bail out the banking system are responsibly allocated. Bypassing Congress and granting a questionable tax code change raises the suspicion that the Bush administration is using yet another crisis to achieve long-sought policy objectives.

http://www.chron.com/disp/story.mpl/edi ... 05434.html

(bolding added).

Of course, the Treasury did not really change the wording of section 382 itself. That can be done only by an Act of Congress.

And the Treasury does not merely "claim" to have the authority to interpret section 382 (and other provisions of the Internal Revenue Code). The Treasury DOES have that authority. Where does the authority come from? From Congress. In the Internal Revenue Code. In fact, some of the authority is found right there -- in subsection (m) of section 382:

(m) REGULATIONS. --The Secretary [of the Treasury or his delegate] shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regulations --

(1) providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and

(2) providing for the application of this section and section 383 in the case of a short taxable year,

(3) providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries,

(4) providing for the application of subsection (g)(4) where there is only 1 corporation involved, and

(5) providing, in the case of any group of corporations described in section 1563(a) (determined by substituting "50 percent" for "80 percent" each place it appears and determined without regard to paragraph (4) thereof), appropriate adjustments to value, built-in gain or loss, and other items so that items are not omitted or taken into account more than once.

By my count, Congress included 22 different references to a "regulation" or regulations" in the text of section 382.

Now, here is an article from CCH that appears to be on this topic:

Treasury and IRS Will Preserve Tax Losses of Seized Financial Corporations

In response to the federal government's takeover of Fannie Mae, Freddie Mac and other financial corporations, Treasury and the IRS recently reiterated that they will preserve these entities' tax losses under Code Sec. 382(m) in future regulations. The government will disregard the testing dates that generally would have applied after a takeover.2


Background

An ownership change occurs when there has been an owner shift or equity structure shift resulting in 50 or more percentage points change in the ownership during a certain period of time. The increase is measured with respect to the lowest percentage of stock owned by such shareholders at any time during the three-year testing period.

The date on which an ownership change occurs is called the change date. The three-year testing period generally ends on the most recent testing date. If there is an ownership change in a loss corporation, the amount of the corporation's pre-change net operating losses (NOLs) that may be applied against its post-change taxable income cannot exceed the Code Sec. 382 limitation.

Comment. The latest action follows up on a similar announcement (Notice 2008-76) immediately after the government seized control of Fannie Mae and Freddie Mac. Guidance under new Notice 2008-84 is couched in more general terms, leaving open its application to other government bailout situations that may now arise.


Update

The government announced in Notice 2008-76 that it would issue regulations applying Code Sec. 382(m) to Fannie Mae and Freddie Mac. Now, Treasury and the IRS have provided additional details by explaining that it will issue regulations providing that the date as of the close of which the U.S. government directly or indirectly owns a more-than-50-percent interest in a loss corporation will not be considered a testing date for purposes of determining whether an ownership change has occurred under Code Sec. 382. The IRS explained that the loss corporation will be required to determine whether there is a testing date (and, if so, whether there has been an ownership change) on any date as of the close of which the U.S. does not own a more-than-50-percent interest in the corporation.

Comment. A more-than-50-percent interest is stock with more than 50 percent of the total value of all stock classes (excluding Code Sec. 1504(a)(4) preferred stock), or more than 50 percent of the combined voting power of all voting stock, or an option to acquire such stock. Back reference: ¶17,115.021.

[fn]2 Notice 2008-84, I.R.B. 2008-41, September 26, 2008.

--from the CCH Internet Tax Research web site (current developments under section 382) (bolding added) (Note: For some reason, the only footnote in the article is numbered as footnote "2").

[Famspear]

Here's another article from CCH:

IRS Describes Application of Code Sec. 382 to Financial Markets Rescue

The IRS intends to issue regulations on the application of Code Sec. 382 when Treasury recapitalizes financial institutions under the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). The new law authorizes Treasury to purchase preferred shares in financial institutions.4


Background

An ownership change in a loss corporation triggers limitation on the use of pre-change net operating losses (NOLs). A loss corporation is a corporation with NOLs, or one with assets with an aggregate basis greater than their aggregate fair market value. If there is an ownership change in a loss corporation, the amount of the corporation's pre-change NOLs that may be applied against its post-change taxable income cannot exceed the Code Sec. 382 limitation. An ownership change occurs when there has been an owner shift or equity structure shift resulting in 50 or more percentage points change in the ownership during a certain period of time.


IRS Action

The IRS explained that the ownership represented by the shares acquired by Treasury will not be considered to have caused Treasury's ownership in the loss corporation to increase over its lowest percentage owned on any earlier date. With certain exceptions, these are considered outstanding for purposes of determining the percentage of loss corporation stock owned by other five-percent shareholders on a testing date. Additionally, for purposes of measuring shifts in ownership by any five-percent shareholder on any testing date occurring on or after the date on which the loss corporation redeems shares of its stock held by Treasury, the shares so redeemed shall be treated as if they had never been outstanding.

Comment. Any capital contribution by Treasury to a loss corporation will not be considered to have been made as part of a plan a principal purpose of which was to avoid or increase any Code Sec. 382 limitation.

The IRS further explained that for all federal income tax purposes, any preferred stock of a loss corporation acquired by Treasury shall be treated as stock described in Code Sec. 1504(a)(4). Any warrant to purchase stock of a loss corporation shall be treated as an option and not as stock. Back reference: ¶17,115.01.

4 Notice 2008-100, I.R.B. 2008-44, October 14, 2008.

[LPC]

Like I said, I myself, and not a tax protestor. For a simple answer why? I am afraid.

There is a story in my family about an ancestor of mine who was a universalist, and who was stopped by a neighbor one day and asked how he could possibly believe that everyone was saved regardless of what they believed or did. The neighbor pointed out that, if the neighbor believed as my ancestor believed, the neighbor could lie, and steal, and kill, and still go to heaven. My ancestor replied that the neighbor was right, and he could do all those things and still go to heaven, and my ancestor concluding by telling him, "And that is why there are other religions, for people like you."

I believe that most people want to comply with the tax laws. They want to do their civic duty and comply with the law regardless of any threat of penalties. They know that taxes are what we pay for civilized society and they want to have a civilized society. And when they sign a tax return and say that it is true and correct, they really want it to be true and correct because they are people of integrity and not because of any legal consequences. There are civil and criminal penalties for people like you.

My point is: It is exactly these types of actions and tactics (the changing of the corporate statute behind closed doors) that tax protestor arguments thrive on.

What tax protesters thrive on is pure unadulturated narcissism. They begin with the result they want (which is not to pay taxes) and then seek a rationalization for that result.

Arguing with tax protesters is therefore like playing whack-a-mole, because smacking down one argument (or one promoter) just causes another to pop up.

I've seen some pretty weird and far-fetched justifications for tax denial, and your claim that Treasury guidance on section 382 somehow justifies your own personal flavor of kool-aid is about as far-fetched as any other.

[LPC]

First off, I'm not really a tax protestor, but I figured this title may garner more attention. I am a former businessman turned writer. And yes, as you can tell by the elegance of my words thus far, I am a phenom. I'm that good.

*that was a joke*

I can't let this pass: If you have to tell people that something is a joke, then it's not a very good joke, is it?

If you look to the upper right corner of your keyboard, you'll find a "backspace" key. If you write something, read it, and realize that it's not funny, you can use that key to delete what you've written *before* you click on the "submit" button.

That's what writers call "editing."

[Demosthenes]

Welcome to Quatloos, Juiceman.

[Famspear]

Welcome to Quatloos, Juiceman.

Yes, welcome to Quatloos, Juiceman!

By the way, regarding your research on information on tax protesters, you've probably already seen this (somewhere.....), but I'll post it here anyway. This is absolutely the best resource, in my opinion:

http://evans-legal.com/dan/tpfaq.html

[Judge Roy Bean]

....
So it seems this board is infested with lawyers, judges, and God knows who else. You all seem to hold a whimsical disdain for the tax protestor movement, including the (what I would call) brave men and women who have taken up the challenge of facing the government head on at their own game - and won.

Whimsical disdain for the tax protester movement?

It's really whimsical when a wife discovers her husband has been putting their way of life in jeopardy or in the most egregious cases facing incarceration. That really strengthens a marriage. The kids probably find the arguments and fights whimsical as well as staying with friends and other family members for a while while "Mom and Dad sort things out." The relatives probably think it's whimsical too when bank accounts are seized and they're being asked to help out when wages are garnished because their fool relative decided to listen to some crackpot theory about not having to pay taxes.

The embarrassment of having to spend hours, days and weeks being dragged through civil court is a whole bunch of whimsy. Asset liquidation auction sales are really whimsical too. And let's not forget the whimsy associated with bankruptcy and the health effects brought on by stress.

And those brave men and women who have "taken up a challenge" haven't taken up anything but someone else's already lost cause.

I have news for you, it isn't a challenge when you're simply parroting a failed argument; it's an exercise in stupidity and as Einstein would imply, doing the same thing over and over and expecting a different result is one definition of insanity.

....
So how would any of you defend this behind-closed-doors change that is now going to increase corporations ability to buy worthless companies so that they may use their losses to lower their taxes, which of course widens the tax gap and shifts more of the burden to the private sector?

You all seem to be so pro government, and yet the department of treasury has just committed an underhand tatic that members of this government say was illegal and wrong. Who do you defend here?

Why defend it? It's yet another example of how Wall Street and K Street are in charge in Washington. Nothing new there. The tax code is riddled with special tax treatment and always has been. None of which has anything to do with the tax protester movement and your confusion about the connection between the two issues.

[grammarian44]

So how would any of you defend this behind-closed-doors change that is now going to increase corporations ability to buy worthless companies so that they may use their losses to lower their taxes, which of course widens the tax gap and shifts more of the burden to the private sector?

Juiceman, I don't think you understand either the general purpose of Section 382 or the reason for the change in regulations applying Section 382.

The goal of the change is not to "increase corporations' ability to buy worthless companies so that they may use their losses to lower their taxes." The whole purpose of Section 382 is to limit the amount of NOL carryovers an acquiror may use in an acquisition. Congress already recognizes the right of acquiring corporations to acquire NOLs. That's in section 381. Section 382 places a limit on the amount that can be carried over. The limit is tied to the value of the target corporation and is subject to a continuity of business requirement. That is, to put it very generally, you can't use losses when the losses exceed the value of the assets you are buying, and you have to continue the target corporation's historic line of business after the acquisition. The 382 limitation is designed to assure that corporations do not traffic in loss corporations. By contrast, there is nothing wrong with carrying over legitimate losses in an acquired corporation up to the 382 limit.

The new regulations address the problem created by the fact that the federal government is now acquiring certain preferred stock. Whether you like the policy of corporate acquisition or not, the IRS simply had to address what this would mean for the existing 382 limitations. The goal was not to increase the ability of corporations to buy loss corporations. The goal was to keep that ability exactly as it already is--that is, the way Congress intended it to be when it enacted 381 and 382.

If you don't think corporations should have any access to corporate NOLs of their targets, you ought to be complaining about section 381, not regulations under section 382. But you're not going to get very far with that complaint, as the general right to target NOLs has been part of the IRC for more than 50 years.

Moreover, I don't see what is "behind closed doors" about this change. You found it with no trouble. As for "shifting the burden to the private sector," all I can say to that one is, "Huh?" You and I must have a different definition of the term "private sector."

And I also don't see what in the world any of this has to do with tax protestors. We're talking about Subchapter C--taxes on corporate distributions and acquisitions. That has nothing whatever to do with the tax protestor movement. Tax protestors don't know the first thing about corporate taxation because they're all tied up with taxation of individual wage income.

[Imalawman]

So how would any of you defend this behind-closed-doors change that is now going to increase corporations ability to buy worthless companies so that they may use their losses to lower their taxes, which of course widens the tax gap and shifts more of the burden to the private sector?

You all seem to be so pro government, and yet the department of treasury has just committed an underhand tatic that members of this government say was illegal and wrong. Who do you defend here?

I don't really think you understand the first thing about IRC 382 or the recent treasury comments. First, the treasury can't issue regulations without first getting public comment, the process takes years and intense scrutiny. What they can do is start treating certain transactions in a certain manner as long as it does not contradict the statute. To understand what is going on requires that you under the IRC 382 and the background. Let me also tell you that the mainstream news agencies really don't quite grasp the situation here so I'd be careful of following their take on all of this. I would look to CCH and TaxAnalyst. But here's some info.

The IRS implemented several changes, starting towards the end of 2007 with some specialized guidance for munis and (REMICs). The changes were part of the IRS plan to relax the Code's loss trafficking rules in order to encourage the acquisition of failing banks. The following gives a brief description of the significant rulings and other guidance the IRS has issued:

In general, Section 382 of the Code limits the ability of a corporation that undergoes an "ownership change" to utilize its pre-change net operating losses (NOLs) and "net unrealized built-in losses" (NUBILs). 1 In general, an ownership change occurs if the percentage (by value) of stock of the loss corporation owned by any one or more 5% shareholders (by value) has increased by more than 50% compared to their lowest percentage ownership in the prior 3 years. Such an ownership change can result from an acquisition of outstanding stock of the loss corporation (whether taxable or in a tax-free acquisition) or an issuance by the loss corporation of new stock for additional capital. If a loss corporation undergoes an ownership change, post change use of its pre-change NOLs and NUBILs is generally subject to an annual limitation (Section 382 Limitation) equal to the product of the fair market value of its outstanding stock immediately before the ownership change multiplied by a statutorily-prescribed interest rate (applicable long-term tax-exempt rate). This interest rate is currently 4.65%, but is adjusted monthly based on market rates.

Two recent Internal Revenue Service (IRS) Notices designed to help failing banks may (1) open the possibility for a corporate acquiror to acquire a bank's built-in loan losses and use those built-in losses against its taxable income, and (2) ease the application of potential tax loss carryover limitations for corporations that raise additional capital by issuing new stock. We expect that these Notices will make significantly more attractive both the acquisition of U.S. banks with underwater mortgages and the furnishing of new capital to distressed banks.

Notice 2008-78 - Capital Contributions to Loss Corporations

As described above, the Section 382 Limitation is determined by valuing a corporation's stock immediately before the ownership change. Capital contributions that increase the total value of the outstanding stock could have the effect of increasing the annual limitation, and, if made ratably by existing shareholders, could reduce the likelihood that other stock transactions would constitute an ownership change. Accordingly, to prevent these potential abuses, Section 382(l) of the Code presumes (except as provided in regulations) that capital contributions made within a two-year period ending on the change date are part of a tax avoidance plan and therefore excludes such capital contributions in determining the Section 382 Limitation.

On September 26, 2008, the IRS issued Notice 2008-78, I.R.B. 2008-41 (Notice 2008-78), in which it announced that it will waive the presumption that a capital contribution within the two-year pre-change period is part of a tax avoidance plan. 2 Notice 2008-78 instead provides a facts and circumstances test in determining whether the contribution is for tax avoidance. It also provides four safe harbors under which a contribution will not have a tax avoidance motive. Under the most relevant safe harbors, a contribution will not be considered as part of a plan for tax avoidance if:

the contribution is made by a person who is neither a controlling shareholder 3 (determined immediately before the contribution) nor a related party, 4 (ii) no more than 20% of the total value of the loss corporation's outstanding stock is issued in connection with the contribution, (iii) 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 (iv) the ownership change occurs more than six months after the contribution; or
the contribution is made either by a related party provided that no more than 10% of the total value of the loss corporation's stock is issued in connection with the contribution, or by a person other than a related party, and (ii) 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 (iii) the ownership change occurs more than one year after the contribution.

Notice 2008-83 - Built-in Loss Limitations of Banks

On September 30, the IRS issued Notice 2008-83, 2008-42 I.R.B. 1 (Notice 2008-83), in which it announced that losses and deductions attributable to loans or bad debts 5 of a bank 6 (including any deduction for a reasonable addition to a reserve for bad debts by a bank) after the date of an ownership change under Section 382 of the Code and which are otherwise allowable, will not be treated as built-in losses or deductions attributable to a pre-change period. 7 Accordingly, Notice 2008-83 effectively removes a potential barrier to acquisitions of struggling banks that have unrecognized loan losses and to equity infusions by prospective investors by assuring that the IRS does not intend to challenge the use of unrecognized losses to offset future taxable income after an ownership change occurs.

Impact of Notice 2008-78 and Notice 2008-83 8

Capital Raising. Notice 2008-78 means that a bank (as well as other corporations) may now raise capital without creating a concern for existing stockholders and potential investors that the value of the corporation's tax "assets" (i.e., the built-in losses) automatically will be impaired by excluding the new capital from the Section 382 Limitation calculation if circumstances should force a change in ownership within the following two years. Notice 2008-83 means that banks can feel free to issue stock to raise new capital without a concern that losses subsequently recognized on troubled mortgages, including those arising from sales under the TARP, will be treated as NUBILs for purposes of Section 382 of the Code. 9

Acquisitions. In practice, Notice 2008-83 means that an acquiring corporation, e.g., a bank holding company (Acquiror) can acquire a bank owning underwater mortgages in a basis preservation transaction (e.g., a stock sale or tax-free reorganization), sell the mortgages (including to Treasury under the TARP), and then use those losses recognized on the sale to offset future income of the Acquiror or other members of its affiliated group. 10

Additional Provisions Modifying Section 382 Treatment (Notice 2008-76, Notice 2008-84 and Notice 2008-100).

On September 29, 2008, the IRS and Treasury announced in Notice 2008-76 that they will issue regulations under Section 382(m) providing that the "testing date" (as defined in Regulations Section 1.382-2(a)(4)) does not include any date on or after the date on which the United States (or an agency or instrumentality thereof) acquires, in a "Housing Act Acquisition," stock or an option to acquire stock in a corporation. The regulations apply after September 6, 2008.

On the same day, the IRS and Treasury issued Notice 2008-84, in which they announced that they will issue regulations under Section 382(m) providing that the "testing date" does not include any date as of the close of which the United States owns a more-than-50 percent interest in a Section 382 loss corporation. The regulations will apply to any taxable year ending after September 25, 2008. Finally, on October 14, 2008, the IRS and Treasury issued Notice 2008-100, providing very favorable guidance regarding the application of Section 382 to loss corporations whose instruments are acquired by Treasury pursuant to the Capital Purchase Program (CPP) under the Act. The Notice generally provides (1) that shares of stock of a loss corporation acquired by Treasury pursuant to the CPP shall not be considered to have caused Treasury's ownership in the loss corporation to have increased over its lowest percentage owned on any earlier date, but subject to certain exceptions, are considered outstanding for purposes of calculating the ownership percentage of other 5 percent shareholders on a testing date; (2) that once shares of stock acquired by Treasury pursuant to CPP are redeemed by the corporation, such shares are not treated as having ever been outstanding for purposes of measuring ownership shifts of any 5 percent shareholder on any testing date on or after the redemption; (3) that any preferred stock acquired by Treasury pursuant to CPP is treated as stock described in Section 1504(a)(4) for all Federal income tax purposes (and is therefore carved out of the definition of "stock" for purposes of Section 382(k)(6)(A); (4) that warrants acquired by Treasury pursuant to CPP shall be treated as options (and not as stock) for all Federal income tax purposes and that options acquired by Treasury will not be deemed exercised for purposes of Section 382; and (5) that capital contributions made by Treasury to a loss corporation pursuant to the CPP shall not be considered to have been made as part of a plan for purposes of Section 382(l)(1) of the Code.

The Notice states that Treasury and the IRS intend to issue regulations setting forth the rules provided in the Notice, but that taxpayers may rely on the Notice unless and until there is additional guidance. Additionally, the Notice states that any future guidance issued contrary to that provided in the Notice will not apply to instruments acquired by Treasury (1) prior to the publication of the contrary guidance or (2) pursuant to binding written contracts entered into prior to the publication of the contrary guidance.

As previously noted, in Notice 2008-81, Treasury announced a Temporary Guarantee Program to enable money market funds to maintain stable $1 per share net asset values, and said that participation in the program will not be treated as a federal guarantee that jeopardizes the tax-exempt treatment of payments by "tax-exempt money market funds" (i.e., money market funds holding enough of their total assets in tax-exempt bonds to be eligible to pay Section 852(b)(5) exempt interest dividends).

In Notice 2008-92, the IRS and Treasury announced that they will not assert that participation in the Temporary Guarantee Program by an "insurance-dedicated money market fund" (a fund with beneficial interests held by investors permitted under Regulations Section 1.817-5(h)(1)) causes a violation of the Section 817(h) diversification requirements in the case of a segregated asset account investing in the fund, or that the fund's participation causes the holder of a variable contract supported by a segregated asset account investing in the fund to be treated as an owner of the fund.

Under a securities loan agreement, a borrower typically borrows securities from a lender and posts collateral to secure its obligation to return identical securities. The initial transfer of securities to the borrower and the return of identical securities to the lender upon termination of the securities lending agreement generally do not result in any gain or loss to the lender for U.S. federal income tax purposes, provided the loan agreement meets certain specified requirements under Section 1058. If, upon a borrower default, the lender applies the collateral to purchase securities that are identical to the securities borrowed, the lender would be required to realize gain, if any. In most situations, losses would be expected to be disallowed as a result of the application of the wash sale rules. On September 29, 2008, the IRS published Revenue Procedure 2008-63 to preserve non-recognition treatment and restore symmetrical results in the case of gains and losses. The Revenue Procedure, effective for taxable years ending on or after January 1, 2008, provides that if a borrower defaults under a securities loan agreement as a direct or indirect result of its bankruptcy (or the bankruptcy of an affiliate) and the lender applies the collateral to purchase identical securities as soon as is commercially practicable after the default (but not more than 30 days following the default), then the transaction will not be a recognition event for U.S. federal income tax purposes to the lender.

Since the 1980s, closed-end funds, corporations, municipal authorities and student loan organizations have issued auction-rate securities (ARS), typically in the form of bonds with long-term maturities or as preferred stock. The interest or dividend rate on ARS is determined by a Dutch auction mechanism through which investors already holding ARS and investors seeking to acquire ARS indicate their interest in holding, purchasing or selling the ARS at specified rates. Auctions are typically held every seven, twenty-eight, thirty-five or forty-nine days, but with respect to some ARS the auctions can occur daily or at longer intervals such as every six months. For issuers, ARS are beneficial as they can provide financing at rates that are lower than variable rate debt instruments. To investors, ARS are attractive as their yield is typically higher than the yield on deposits or money market funds. The ARS market currently has an estimated size of a few hundred billion dollars. Lately, as a result of the current credit crunch, there has been little or no interest in purchasing ARS resulting in wholesale auction failures. Upon an auction failure, the interest or dividend rate on the ARS defaults to a maximum rate which, generally, is intended to be an above-market rate at original issuance that is intended to compensate holders of the ARS for the illiquidity of the securities. However, due to the credit crisis, some of these rates are now viewed as below market, causing ARS to become even more illiquid.

In response to the illiquidity problem, the IRS issued Notices 2008-27 and 2008-41, providing guidance to issuers of tax-exempt bonds that wish to either convert their outstanding bonds from ARS to bonds with a fixed or floating interest rate to maturity or to purchase their own ARS from the market. Pursuant to these notices, under certain limited circumstances, the conversion of a tax-exempt ARS to a bond with a fixed or floating interest rate will not result in a reissuance for U.S. federal income tax purposes, and, in applying the tax-exempt bond rules, an issuer may purchase its own tax-exempt ARS without such purchase resulting in a retirement of the bonds for U.S. federal income tax purposes, which could potentially result in adverse tax consequences to the issuer.

With respect to ARS issued as preferred stock, in order to preserve their status as "equity" for tax purposes, it is particularly important that investors not be viewed as having the right to put the ARS to the issuer on demand. Notwithstanding, some had proposed that holders of such ARS be permitted to sell, pursuant to a liquidity facility agreement, their shares to a liquidity provider upon a failed auction. This would broaden the market for potential ARS investors as tax exempt money market funds (frequently referred to as 2a-7 funds) would subsequently be allowed to purchase ARS under the '40 Act from issuers that are themselves RICs. Under the proposal, the liquidity provider would try to sell the ARS (including by participating in subsequent auctions). Further, the issuer would be required to redeem the stock after a specified period of time if the liquidity provider is unable to sell the ARS. The proposal was designed to permit new investors to invest in ARS.

In response, the IRS issued Notice 2008-55, confirming that it will not challenge the equity characterization of the ARS if a liquidity facility agreement such as the one described above were entered into. As a result, payments on the ARS should still be characterized as exempt-interest dividends (to the extent of the issuer's exempt interest) and not as taxable interest, which would have been the consequence if the ARS were instead treated as debt for U.S. federal income tax purposes. In general, the notice only applies if, among other requirements, the ARS are issued by closed-end funds that are RICs and that invest exclusively in taxable or tax-exempt bonds, the ARS were outstanding on February 12, 2008 (or issued after that date to refinance ARS that were outstanding on that date) and the liquidity provider is unrelated to the issuer.

The IRS' latest installment of relief provisions for the ARS market provides guidance to holders of ARS in light of recent announcements by Wall Street firms that they will buy back billions of dollars worth of ARS from aggrieved investors. On September 29, 2008, the IRS issued Revenue Procedure 2008-58 (Rev. Proc. 2008-58), providing assurance to investors in the auction rate securities market that the IRS will not challenge certain tax positions taken with regard to settlement of potential legal claims related to such securities.

Rev. Proc. 2008-58 focuses on ARS holders that have the right during a specified "window period" to cause an issuer to buy back the ARS for par amount in order to settle potential legal claims against the issuer (e.g., that the issuer did not properly disclose the potential that the ARS would become illiquid). Alternatively, the ARS holder may borrow the par amount of the ARS from the issuer prior to the window period while securing the "loan" with the ARS. Rev Proc 2008-58 also contemplates a scenario in which the ARS holder does not exercise the settlement right, in which case the ARS holder would continue to receive payment under the maximum penalty rate upon a continued auction failure or receive a return that would fluctuate based on the auction rate-setting process, ultimately affecting the holder's economic return. If the ARS holder were to hold the security after the window period, the ARS holder would continue to be entitled to exercise all voting rights associated with the security and to sell the security to a third party.

The IRS stated that it will not challenge the following positions: (1) that the taxpayer continues to own the auction rate security upon accepting (or "opting into") the settlement offer until the tender of the security; (2) that the taxpayer does not realize any income as a result of accepting the settlement offer and does not reduce the basis of ARS from its original purchase price; and (3) that the taxpayer's amount realized from the sale of ARS during the window period to the party offering the settlement is the full amount of the cash proceeds received from that party.

Rev Proc 2008-58 applies to taxpayers that accept settlement offers prior to June 30, 2009 and have such settlement offers in which the window period does not extend beyond December 31, 2012, where such relevant ARS were purchased prior to February 14, 2008. Significantly, a revision to Rev. Proc. 2008-58 on September 29 clarifies that the relief provisions would still apply even if an ARS holder is not required to release claims in connection with the settlement. The new Rev. Proc. serves to eliminate some uncertainty for the throngs of ARS investors that will face various tax issues as a result of these settlements.

Facilitating Intercompany Liquidity

In general, the provisions in the Code applicable to a controlled foreign corporation (CFC) may result in phantom income inclusion to a U.S. shareholder that owns 10% or more of the voting stock of the CFC under certain circumstances. Code Section 956 provides for such an income inclusion when a CFC makes an investment of earnings in U.S. property, which includes certain loans by the CFC to related U.S. persons. The IRS and Treasury had previously announced in Notice 88-108 that final regulations issued under Section 956 will exclude an obligation from the purview of Section 956 where the obligation is collected within 30 days from the time it is incurred. To facilitate liquidity in the near term, on October 10, 2008, the IRS and Treasury announced in Notice 2008-91 that they will issue regulations providing that, for Section 956 purposes, a CFC may choose to exclude an obligation held by the CFC that would otherwise be an investment in "United States property" if the obligation is collected within 60 days from the time it is incurred. The exclusion does not apply if the CFC holds for 180 or more calendar days during its taxable year obligations that would be an investment in "United States property" without regard to the new 60 day rule. Additionally, a CFC may apply Notice 2008-91 or Notice 88-108, but not both. Notice 2008-91 applies for the foreign corporation's first two taxable years ending after October 3, 2008."

So, now you have some real technical understanding of the situation and can make some informed decisions about this IRS action. In light of this comments what do you think about it? Personally, I think the IRS is being very taxpayer friendly with these rules. Too much? well, I think it isn't contrary to statute and I think it is a good policy considering the financial situation that we are face with. It is odd that you find fault with the IRS even when they are favoring the taxpayer. Honestly, not too many people have dissected the late 2008 action by the IRS to fully understand the full import of the bulletins. Certainly I won't have a better idea until I sit down and go over all of the regs on 382 and 383. (unlikely that I will do so before end of December)

[webhick]

You all seem to hold a whimsical disdain for the tax protestor movement

From a distance (such as here), I do - because it's my only outlet for the frustrations they cause me in real life. I've had the displeasure of up-close-and-personal experiences with tax protesters and I don't very much find much whimsy in having my life threatened, being harassed, my client's being harassed, constantly being nagged at over every little word in the English language, helping the wives of the TP clean up the mess that their husbands made of their lives (it works both ways, but I've only personally seen it one way), giving out government commodities to tax protesters at my food pantry, etc. That last one really pisses me off because he brags about "getting one over on government" when I give him food, argues with me for double the standard allotment (which is based on household size), lies about his household size, and tries to take other people's food. And while everyone who comes to the pantry tries to give back to the pantry in some way and is very considerate to the others, he's the only one who tries to cut in line and outright refuses to help an eighty-year old woman carry out her bags when I'm manning the operation by myself and have fifteen people in line waiting for food. I can honestly say that I have never come into contact with TP who I actually liked as a person, regardless of their point-of-view on taxes.

Other people here have dealt with TPs in their day-to-day life as well and I'm sure they experienced more problems than I have.

[Imalawman]

It's not whimsy, its a curious interest in the ability of some people to believe something that is utter nonsense and defend it in face of overwhelming evidence to the contrary. I suppose some of the interest is akin to schadenfreude, but otherwise it is bemusement at narcissistic protestations that lunacy is logic and inanity is reason. Tax protesting can at times be very humorous and at the same time we hope that some people will read this forum and be dissuaded from the very, very real consequences of such insane and illegal activity.

[Famspear]

. . . . I suppose some of the interest is akin to schadenfreude . . .

I have a first cousin who's kin to Schadenfreude by marriage, but I guess that in and of itself doesn't make me akin to Schadenfreude.

Tax protesting can at times be very humorous and at the same time we hope that some people will read this forum and be dissuaded from the very, very real consequences of such insane and illegal activity.

Also, just writing about tax protesting can at times be very humorous, but I guess we'll let others be the judge of that......

[Demosthenes]

Tax protesters are like those shiny foil-covered easter bunnies you got as a kid. Crunchy chocolate on the outside, but once you bite their little heads off, you're always disappointed to find that there's nothing but stale air inside.



Only a tax protester would think that laughing at delusional ignorant hot heads means that the people doing the laughing are pro-government.

[Cpt Banjo]

Personally, I think the IRS is being very taxpayer friendly with these rules. Too much? well, I think it isn't contrary to statute and I think it is a good policy considering the financial situation that we are face with.

For opposing views regarding the Service’s authority to do what it did in Notice 2008-83, see

http://online.wsj.com/article/SB122428410507346351.html

http://www.washingtonpost.com/wp-dyn/co ... id=topnews

I confess to some unease in questioning the authority of a pro-taxpayer measure such as Notice 2008-83, but I honestly don't see how it's consistent with the statutory language. I further admit that I utilize similar goodies that appear to have absolutely no statutory authorization [warning: tax geek reference ahead] (e.g., a Section 338(h)(10) election for an S corporation target).

Maybe it's the whole bailout atmosphere, which really rubs me the wrong way. I feel like the TV commentator in Airplane! (patterned after James J. Kilpatrick's appearances on 60 Minutes), who said, "Shana, they bought their tickets. They knew what they were getting into. I say, let 'em crash." http://www.youtube.com/watch?v=Eux_bzpJHiY

I feel the same way about the businesses whose own greed got themselves into trouble: I say, let 'em fail. And the same goes for all the companies that are encamped in Washington as we speak, with their hands out begging for a bailout to save themselves from competition and their own ineptitude (e.g., GM and Ford).

I will get off my soapbox now.