Tax Amnesty, Texas Taxes

Texas Tax Notes

It has been a while since I posted anything on my blog.   I’ve been burning the midnight oil on some interesting projects for clients.  For some reason, the folks around HM&M think I should log some billable hours to get a paycheck.  I need to check my contract again.

 Anyway, there are some interesting items concerning Texas taxes.

 Remember, it is amnesty time in Texas.  The Fresh Start tax amnesty period started June 12 and runs through August 17, 2012.  See my post of March 28, 2012 for more information.

Texas Franchise Tax Matters

There is a new Common Owner Information Report that must be filed with the Comptroller for Texas Franchise Tax purposes.  A new report this year, it can be filed by using the Texas WebFile system (but not corrected on WebFile).  Combined groups are getting notices that they should file this report.  We are pretty sure that these only need to be filed by combined groups protecting temporary credits for business loss carryforwards.  However, representatives of the Comptroller’s office have various conflicting opinions about that conclusion.  If you get a notice and don’t have a temporary credit, you might file the form anyway; it’s easier than arguing with the Comptroller’s office.

 Earlier this month, the Comptroller reversed field on its position with regard to the election to take the cost of goods sold (“COGS”) or compensation deduction when filing an amended long form franchise tax report.  The Comptroller’s Texas Franchise Tax rules said you could not switch between the COGS and the compensation deduction on an amended return.  Now the Comptroller says you can.  That’s nice.  If you think you might have chosen the wrong number, act now.

Southwest Royalties v. Combs

In a recent case in a district court in Austin, the judge issued an oral judgment on April 10 in favor of the taxpayer in Southwest Royalties v. Combs:  downhole equipment used in oil and gas extraction is exempt from sales tax under the manufacturing equipment exemption. 

Then, according to the Austin American-Statesman, “the ever-colorful [State District Judge John] Dietz recalled that he had been reading The Wall Street Journal over a breakfast of oat gruel when he saw that some Texas judge had recently overturned 50 years of tax law and crippled the state budget [reducing revenue by about $500 million each year and setting up potential refund claims to the tune of $2 billion, plus interest]. ‘What fool did that?’ Dietz wondered as he read the story.  ‘I’ll be damned; it’s me.'”

So, Judge Dietz ordered a rehearing and reversed his findings a couple of weeks later.

We understand that Southwest Royalties is considering an appeal of the decision.  Also, there are other similar cases working their way through the court system that will be heard by other Texas courts.  It seems prudent for oil and gas companies to file protective claims for refund for periods that may be approaching the statute of limitations for refund claims – four years.

Severance Tax Matters 

Oil and gas companies can get a Texas severance tax exemption (limited, but to a substantial sum) for high cost gas wells.  Among other definitions of “high cost” is a well that produces from “the Devonian shale; or designated tight formations or produced as a result of production enhancement work” such as hydraulic fracturing (“fracking”).  The underlined phrase encompasses most wells drilled in Texas these days.  If you haven’t been pursuing this exemption, jump on it. 

There is also a full or partial exemption from Texas severance tax for low producing gas wells (production not exceeding an average 90 MCF per day for the prior three months).  Because natural gas prices are so low currently, production from low producing gas wells is currently fully exempt from severance tax.  Are you still paying severance tax on gas production from such wells?  Get it in gear. 

That’s all for now.


IRS, Tax Court

It Has Been a Bad Spell for Charitable Donors Who Don’t Follow the Rules

In the last three weeks, the Tax Court has issued two decisions that demonstrate the importance of complying with the rules for substantiating a charitable contribution.    These cases are cautionary tales writ large!

Under Section 170(f)(8)(A) of the Internal Revenue Code, no charitable contribution deduction for any contribution of $250 or more is allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment of the contribution by the donee organization that meets certain specified requirements.  A written acknowledgement is contemporaneous if it is obtained by the taxpayer on or before the earlier of: (1) the date the taxpayer files the original return for the tax year of the contribution; or (2) the due date (including extensions) for filing the original return for the year. 

In David P. Durden, et ux., TC Memo 2012-140, the Durdens gave over $22,000 to their church in 2007.  The IRS disallowed the charitable contributions in a notice of deficiency sent April 13, 2009.  (The case does not explain how the notice of deficiency came into existence, but it may have simply come over the transom as part of a correspondence audit:  you, the taxpayer, can’t deduct the contributions until you submit to us, the IRS, proper documentation.)  The petitioners sent the IRS a letter from the church dated January 10, 2008, which acknowledged contributions from them during 2007 of the amount deducted.  The IRS did not accept this acknowledgement because, while it was “contemporaneous,” it lacked a statement regarding whether any goods or services were provided in consideration for the contributions, such statement being one of the “certain specified requirements” mentioned above.

No problem, thought the Durdens.  They obtained a letter from the church dated June 21, 2009 that contained the right language.  Sorry, says the IRS.  That acknowledgement is not acceptable because it was not “contemporaneous” as defined.  The Tax Court agreed with the IRS and the Durdens did not get a charitable contribution deduction.

There are a lot more rules concerning substantiation and documentation of charitable contributions.  In Joseph Mohamed, Sr., et ux. TC Memo 2012-152, the Mohameds lost charitable contribution deductions of over $18,500,000, because they did not follow the extensive regulatory requirements for substantiating charitable contribution deductions over $5,000.  In this case, Mr. Mohamed prepared his own return and found the instructions for Form 8283 confusing and, apparently, too burdensome to spend much time reading.

Sorry, says the Tax Court.   “We recognize that this result is harsh – a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions – all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions.  But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.”

So, in the past, we may have seemed a bit picky when we asked for and poured over the documentation for your charitable contributions.  Hopefully, you now understand a little better why we do what we do.