Communication, Technology & Media
Carriage/Launch Fees Paid to Cable/Satellite/Television Operators by Programmers/Content Providers
Cable television operators, commonly referred to as multiple system operators (MSO), may receive cash incentives, referred to as launch fees, in connection with the execution of long-term affiliation agreements. The issue is whether the launch fee payment may be deferred under Revenue Procedure 71-21, 1971-2 C.B. 549, and taken into income over the agreement period.
Amortization of Intangibles: Licensed Program Contract Right
Fees for the rights to broadcast sporting events are among the biggest costs of television broadcasters and cable channel operators, running to the billions of dollars for the largest taxpayers. Many broadcasters and cable channel providers accrue their license fee liabilities upon the execution of the broadcast rights contracts and amortize the fees over the three-to-five-year term of the contract. Compliance takes the position that the taxpayer's accruals at contract execution are premature and that the fees may only be accrued as the games are played.
Financial Services
REMICs
The Service is looking into the issue of REMIC sponsors’ understatement of reportable gain on the retention and the sale of regular interests. Under the statutory and regulatory scheme, undervaluing REMIC regular interests retained by the sponsor results in a change in the relative allocation of basis to all the other REMIC regular interests under the proportionate to fair market value basis allocation formula. The Service will be reviewing the sponsor's economic models and assumptions (such as the loss rate, the prepayment rate, and the discount rate) used to value the residual interests in order to determine if the fair market value and basis allocations are appropriate for the retained regular interests.
Premium Deficiency Reserves
The issue concerns a reserve required to be established by health, life and property casualty companies to book all additional liabilities and expenses associated with any contract that will produce a loss during the subsequent year.
The deficiency reserves are not allowed to be included as part of the premiums earned calculation and they are not deductible as losses incurred under IRC Section 832(c)(4). The IRC and underlying Regulations make it extremely clear that this reserve cannot be included within the UPR, and for the reserve to be claimed as losses or expenses incurred under IRC 832(b)(5) the loss event must have occurred by the valuation date, and loss events to be incurred during future periods cannot be included within the computation of losses incurred.
Heavy Manufacturing & Transportation
Motor Vehicle Dealerships and IRC 263A (Uniform Capitalization/UNICAP)
In the late 1980s, the tax code was modified to require retailers (including motor vehicle retailers) to capitalize costs of carrying inventory that were previously expensed. The majority of dealerships began using a variation of the simplified retail method allowed by the Uniform Capitalization (UNICAP) rules for IRC 263A to calculate capitalized costs.
In 2007, the IRS issued a Taxpayer Advice Memorandum (TAM) which limited the use of the simplified retail method. It also called for capitalization of additional expenses in some cases.
The issue is significant because the TAM contains an interpretation and legal positions not raised before. Compliance risk exists due to the uncertainty regarding:
-
how to apply a non-precedential guidance document (the TAM),
-
inconsistent treatment by examiners, and
-
an industry of 20,000+ that is virtually completely non-compliant (with the TAM).
Loyalty Programs in Service Industries
The Service is concerned about the appropriate tax treatment of Loyalty Programs such as “Frequent Flyer” programs in the air transportation industry and “Frequent Stay” programs in the hospitality industry. The Service is exploring the fact patterns and legal authorities to determine the appropriate method and accounting period for reporting revenue and expenses. The question is: Are revenues received by air carriers as payment for frequent flyer points deferrable under Rev. Proc. 71-21 or Rev. Proc. 2004-34?
Natural Resources & Construction
Delay Rentals
At issue is whether these delay rental payments are subject to capitalization under IRC §263A as costs of producing property. Petroleum companies acquire leasehold mineral interests in the ordinary course of their businesses. At the time of the acquisition, the lessee/sub lessee pays and capitalizes the leasehold bonus paid to the property or mineral owner. For any period that the lessee fails to drill on the leasehold, the lessee must pay a delay rental to the property or mineral owner.
It is not reasonable for taxpayers to take the position that all delay rentals are currently deductible in tax years which were before the effective date of the pre-production rule in the final regulations. Rather, delay rentals should have been treated as any other type of carrying cost subject to capitalization under section 263A, and some portion of the delay rentals actually incurred must have been capitalized.
IRC §198 Expensing Of Environmental Remediation Costs (Commonly referred to as the Federal Brownfield Tax Incentive)
The Service is concerned about taxpayers’ awareness of and compliance with the multiple requirements under IRC§198, its related Revenue Procedure 98-47 as well as Schedule M-3 reporting requirements. Further, the Service is exploring the relationship between capitalization requirements of environmental remediation costs and the expensing of such costs.
Retailers, Food, Pharmaceuticals & Healthcare
Cost Segregation Studies
Whether an asset is Section 1250 property (generally 39- year recovery period) or Section 1245 property (generally 5 or 7-year recovery period). There has been an increase in claims reclassifying Section 1250 property as Section 1245 property. This issue affects numerous RFPH industries: retail, restaurants, and biotech/pharmaceutical. Industry Director's Directives are available for each respective industry and they contain specific asset classification recommendations.
Vendor Allowances
The vendor allowance issue concerns the appropriate characterization of the allowance for tax reporting purposes. Vendor allowances include, but are not limited to, asset-based allowances, merchandise-based allowances, sales-based allowances, post acquisition-based allowances and can also include upfront payments.
At issue is whether the various types of vendor allowances that can be received by a taxpayer in the normal course of business constitute:
-
Gross income under IRC § 61,
-
Trade or other discounts reducing the invoice price of merchandise acquired during the taxable year under Regulation § 1.471-3(b), or
-
Reimbursement of an expense.
|