Daily Tax Update - May 23, 2008

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS FROM ITS MEMORIAL DAY RECESS ON JUNE 3RD.

IRS AND TREASURY ISSUE FINAL AND TEMPORARY REGULATIONS UNDER SECTION 367(b) ADDRESSING “KILLER B” TRIANGULAR REORGANIZATIONS: Today, the IRS and Treasury issued final and temporary regulations implementing the rules announced in Notice 2006-85 and Notice 2007-48 to address certain triangular reorganizations commonly referred to as “Killer B” transactions.

• In 2006 and 2007 the IRS and Treasury announced that regulations would be issued to address certain triangular reorganizations involving foreign corporations. In such transactions, the parent corporation would sell some its stock to a subsidiary in exchange for cash or a note and then the subsidiary would exchange the parent stock for the stock or assets of a target corporation. Some taxpayers took the position that the sale of stock from parent to subsidiary did not result in a section 301 distribution. In cases where the subsidiary is foreign and the parent is domestic, this transaction could be used to repatriate earnings from abroad without a corresponding dividend subject to US tax. Similarly, in cases where the parent was foreign and the subsidiary was domestic, the transaction could be used to transfer earnings from the US to a foreign corporation without withholding tax. If both the parent and the subsidiary were foreign, the transaction could be used in certain cases to avoid income inclusions subject to tax under subpart F.
• In Notice 2006-85, the IRS and Treasury announced regulations would be issued addressing this type of transaction and providing that the transfer of property from the subsidiary to the parent in exchange for parent stock would be treated as having the effect of a distribution under section 301. In addition, the IRS and Treasury issued Notice 2007-48 announcing that regulations would be issued to address similar transactions in which the subsidiary acquires parent stock from a third party in a related transaction.
• Today, the IRS and Treasury issued final and temporary transactions implementing the rules announced in Notice 2006-85 and Notice 2007-48. The temporary regulations state that their purpose is “to prevent what is in effect a distribution of property to [parent] without the application of provisions otherwise applicable to property distributions, when in connection with a triangular reorganization, [subsidiary] acquires, in exchange for property, all or a portion of the [parent] stock used in the reorganization.” The final regulations revise the existing final regulations under § 1.367(b)-13 and § 1.367(b)-2 to clarify and conform certain definitions used throughout the section 367(b) regulations.
• The temporary regulations apply to triangular reorganizations where the parent or subsidiary (or both) is foreign, and, in connection with the reorganization, the subsidiary acquires, in exchange for property, all or a portion of the parent stock that is used to acquire the stock or assets of the target corporation. The preamble describes the “in connection with” standard as “a broad standard that includes any transaction related to the reorganization even if the transaction is not part of the plan of reorganization.” The temporary regulations provide that adjustments shall be made that have the effect of a distribution of property from subsidiary to parent under section 301. In addition, the temporary regulations provide that to the extent the subsidiary buys parent stock from a person other than the parent, the transaction will be treated as a deemed distribution from subsidiary to parent following immediately by a deemed contribution from parent to subsidiary of the property deemed distributed. The temporary regulations contain an anti-abuse rule that provides that appropriate adjustments shall be made if in connection with a triangular reorganization a transaction is in engaged in with a view to avoid the purpose of the regulations.
• The temporary regulations are effective for triangular reorganizations that occur on or after September 22, 2006 and involve an acquisition of parent stock by subsidiary from parent. For triangular reorganizations that involve an acquisition of parent stock from a third party, the temporary regulations are effective for transactions that occur on or after May 31, 2007. In both cases, there are certain exceptions for transactions entering pursuant to earlier binding written agreements.
• For additional information, contact Philip R. West - pwest@steptoe.com.
• The regulations can be accessed via:   http://federalregister.gov/OFRUpload/OFRData/2008-11653_PI.pdf  and http://federalregister.gov/OFRUpload/OFRData/2008-11647_PI.pdf

SENATE PASSES MILITARY TAX BILL: Yesterday, the Senate passed a fully offset, $1.2 billion military tax relief package that would mandate that foreign subsidiaries of US-based government contractors pay employment taxes. The House passed the bill earlier this week. Revenue raisers in the bill include a provision to treat foreign subsidiaries of US-based government contractors as domestic companies for tax purposes, a provision that would seek to prevent wealthy US expatriates from evading taxes on their worldwide income by renouncing their US citizenship, and a provision that would increase the general failure-to-file penalty for tax returns. The Administration has not stated its position on the bill. 

TAX BILLS INTRODUCED MAY 22nd:
H.R.6133: To amend the Internal Revenue Code of 1986 to extend and modify the renewable energy production tax credit and the solar energy and fuel cell investment tax credit.
Sponsor: Rep Terry, Lee [NE-2] (introduced 5/22/2008)      Cosponsors (24)

H.R.6157: To amend the Internal Revenue Code of 1986 to modify the exception from the 10 percent penalty for early withdrawals from governmental plans for qualified public safety employees.
Sponsor: Rep Meek, Kendrick B. [FL-17] (introduced 5/22/2008)      Cosponsors (None)

H.R.6165: To amend the Internal Revenue Code of 1986 to assist individuals confronting high gasoline and diesel fuel costs in commuting to work by allowing a refundable credit against income tax based on the business standard mileage rate for commuting miles, and for other purposes.
Sponsor: Rep Whitfield, Ed [KY-1] (introduced 5/22/2008)      Cosponsors (None)

S.3048: A bill to amend the Internal Revenue Code of 1986 to make the allowance of bonus depreciation and the increased expensing limitations permanent.
Sponsor: Sen Alexander, Lamar [TN] (introduced 5/22/2008)      Cosponsors (None)

 S.3049: A bill to amend the Internal Revenue Code of 1986 to make the capital gains and dividends rate permanent and to provide estate tax relief and reform, and for other purposes.
Sponsor: Sen Alexander, Lamar [TN] (introduced 5/22/2008)      Cosponsors (None)

S.3055: A bill to amend the Internal Revenue Code of 1986 to modify the rate of the excise tax on certain wooden arrows designed for use by children.
Sponsor: Sen Wyden, Ron [OR] (introduced 5/22/2008)      Cosponsors (1)

S.3063: A bill to amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.
Sponsor: Sen Lincoln, Blanche L. [AR] (introduced 5/22/2008)      Cosponsors (3)

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.