Daily Tax Update - March 6, 2008

TREASURY AND IRS ISSUE TEMPORARY REGULATIONS ON THE MATCHING RULE FOR CERTAIN GAINS ON MEMBER STOCK: Today, Treasury and the IRS issued temporary regulations under section 1502 revising §1.1502-13(c)(6)(ii)(C) to provide for an exception to the rule limiting redetermination of certain intercompany gains with respect to member stock within a consolidated group. The Preamble explains that the purpose of the provision is to prevent the effective duplication of gain within a consolidated group that would result from taking an intercompany gain into account without any corresponding tax basis (or other resulting tax benefit). According to the Preamble to the temporary regulations, the “new rule has the advantage of clarity, and avoids requiring the IRS to exercise its discretion on an ad hoc basis.”

• The temporary regulations provide a rule under which, notwithstanding §1.1502-13(c)(6)(ii)(A)(1), an intercompany gain with respect to member stock is redetermined to be excluded from gross income to the extent that (1) such gain is the common parent’s (P) intercompany item, (2) immediately before the intercompany gain is taken into account, P holds the member stock with respect to which the intercompany gain was realized, (3) P’s basis in such member stock that reflects the intercompany gain that is taken into account is eliminated without the recognition of gain or loss (and that basis is not further reflected in the basis of any successor asset), (4) the group has not and will not derive any Federal income tax benefit from the intercompany transaction that gave rise to such intercompany gain or the redetermination of the intercompany gain (including any adjustment to basis in member stock under §1.1502-32), and (5) the effects of the intercompany transaction have not previously been reflected, directly or indirectly, on the group’s consolidated return.
• The Preamble explains that the provision’s five requirements are intended to ensure that any intercompany gain with respect to member stock may only be redetermined to be excluded from gross income to the extent that it is not reflected in basis after the transaction (or does not result in some other tax benefit). Treasury and the IRS are requesting comments as to whether the rule should be broadened to apply to additional situations that would result in the effective duplication of gain.
• For additional information, contact Steven B. Teplinsky - steplinsky@steptoe.com, or Lisa M. Zarlenga - lzarlenga@steptoe.com 
• The regulations can be accessed via:  http://www.steptoe.com/attachment.html/3310.pdf 

HOUSE BUDGET COMMITTEE PASSES BUDGET RESOLUTION: Today, the House Budget Committee passed a fiscal 2009 budget resolution that would offset a one-year patch to the alternative minimum tax and create a deficit-neutral reserve fund for the extension of middle-income tax breaks. The Senate Budget Committee is considering a budget plan that includes a one-year AMT patch without an offset.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.

• Learn more about the members of the tax practice group.