Daily Tax Update - September 10, 2008

IRS AND TREASURY ISSUE FINAL UNIFIED LOSS RULE REGULATIONS APPLICABLE TO LOSSES ON SUBSIDIARY STOCK:  Today, the IRS and Treasury issued final regulations applicable to members of a consolidated group that transfer loss shares of subsidiary stock.  The final regulations generally adopt regulations that were proposed in January 2007, with certain exceptions. The January 2007 proposed regulations replaced earlier proposed regulations that contained loss disallowance and loss duplication rules. 

• Under the final regulations, the Unified Loss Rule applies when a member of a consolidated group transfers a share of subsidiary stock and, after taking into account the effects of all rules of law applicable as of the transfer, the share is a loss share. The Unified Loss Rule consists of three principal rules that are applied sequentially upon a sale of a loss share of subsidiary stock. First, a basis redetermination rule reallocates investment adjustments to address both noneconomic and duplicated stock loss. Second, if there is still a transfer of a loss share after the application of the basis redetermination rule, a basis reduction rule applies. Finally, if there is still a transfer of a loss share of the application of the basis reduction rule, an attribute reduction rule applies.
• The IRS and Treasury noted in the preamble to the final regulations that the general reaction from commentators to the proposed Unified Loss Rule regulations was that they reached a “fair and reasonable systemic balance.” The preamble also noted, however, that commentators expressed certain concerns regarding complexity and the administrative burden of obtaining the data necessary to apply the proposed rules. The final regulations incorporate certain changes to respond to these concerns. In certain other instances, the IRS and Treasury retained the proposed rules in the final regulations and defended them as necessary to preserve fairness and obtain appropriate results.
• Among other changes, the final regulations provide that a disposition of subsidiary stock in a liquidation to which section 332 applies is not excepted from the definition of a transfer if more than one member of the group owns stock in the liquidating subsidiary. Therefore, the Unified Loss Rule applies to such a liquidation. However, the final regulations provide that in such a case, only the basis redetermination rule applies. Neither the basis reduction rule nor the attribute reduction rule applies to such a transfer.
• In addition, the final regulations provide that the loss limitation rule in section 362(e)(2) does not apply to intercompany transactions. The preamble indicated that the IRS and Treasury concluded that he application of section 362(e)(2) to intercompany transactions was burdensome and disruptive of the balance struck in various consolidated return provisions. The final regulations, however, include an anti-abuse rule that provides for appropriate adjustments to be made to clearly reflect the income of the group if a taxpayer acts with a view to prevent the consolidated return provisions from properly addressing loss duplication.
• The IRS and Treasury rejected suggestions made by some commentators to incorporate either a mandatory or elective look‑through approach into the Unified Loss Rule for purposes of determining the basis in lower-tier subsidiary stock. Under such an approach, taxpayers would look solely to the net inside attributes of lower-tier subsidiaries rather than compute stock basis information. The IRS and Treasury, however, indicated that this approach could lead to inappropriate results and diminish the balance and fairness of the regulations. The preamble noted that the IRS and Treasury recognize taxpayers’ concerns and are considering various proposals, included a conforming basis election, to mitigate the identified taxpayer difficulties on a system-wide basis.
• The final regulations are effective on the date they are published in the Federal Register. Consistent with Notice 2008-9, the final regulations include a transition rule that provides that the final regulations do not apply to transfers between unrelated parties if made pursuant to an agreement that is binding before the final regulations are published.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com, Lisa M. Zarlenga - lzarlenga@steptoe.com, or Gregory N. Kidder - gkidder@steptoe.com
• The regulations can be accessed here and here.
  

IRS ISSUES TEMPORARY REGULATIONS ON PENALTIES FOR FAILURE TO DISCLOSE REPORTABLE TRANSACTIONS:  Today, the IRS issued temporary regulations that also serve as the text for proposed regulations for penalties imposed under Section 6707A for failure to include on any return or statement any information with respect to a reportable transaction which is required under section 6011. The regulations are effective starting September 11, 2008.

• The regulations provide that a taxpayer may incur separate penalties under section 6707A for each reportable transaction where the taxpayer was required, but failed, to disclose as required under section 6011.
• The regulations also provide for the rescission of this penalty for reportable transactions that are not listed transactions if rescission would promote compliance with the requirements of the code and effective tax administration. Rev. Proc. 2007-21 provides the procedures for requesting rescission.
• The factors considered for rescission included in the regulations are generally adopted from Rev. Proc. 2007-21 and from those mentioned in the legislative history.
• The IRS will consider disclosure, even if untimely, that occurs before IRS contact with the taxpayer; unintentional mistake of fact; the established history of the taxpayer; events outside of the taxpayer’s control; cooperation with the IRS; and whether assessment weighs against equity and good conscience, such as whether the penalty is disproportionate to the tax benefit received, and whether the taxpayer acted in good faith or with reasonable cause. The regulations specifically note that this list is not exhaustive.
• The regulations follow Rev. Proc. 2007-21 in providing that a rescission request is not the appropriate forum to contest whether the elements necessary to support a penalty under section 6707A exist.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Matthew D. Lerner - mlerner@steptoe.com 
• The regulations can be accessed here and here.
  

TREASURY, IRS RELEASE 2008-2009 PRIORITY GUIDANCE PLAN: Today, the Treasury Department and the IRS released the 2008-2009 Priority Guidance Plan, which contains 314 projects to be completed from July 2008 through June 2009. According to their joint statement, “This year’s plan will address a variety of issues, including recent legislation, conditions in the housing market, the current economic environment, and important international issues.”

• The IRS has also updated the 2007-2008 guidance priority list to reflect the publication of guidance responding to current developments.

BAUCUS SAYS CONGRESS MAY NOT ACT ON TAX EXTENDERS BEFORE ADJOURNMENT:  Yesterday, Senate Finance Committee Chairman Max Baucus said that he believes Congress would act on a one-year alternative minimum patch before adjournment, but Congress may not pass the extenders bill this year. Congress is expected to spend the next couple of weeks working on an energy package. September 26^th is the target adjournment date.

• Baucus said, “That would be, I think, most unfortunate, if extenders are not passed this year, because so many people rely on them. The country needs predictability, certainty. We've let these expire in the past and caused near consternation, and it would be irresponsible for us not to continue them, so I'm going to do all that I can to approve all of the extenders, including AMT.”
• House Majority Leader Steny Hoyer criticized the Senate for its inaction on the extenders package. Hoyer said, “The Senate is locked up by a minority. . .I think the Senate, frankly, has not been responsible in putting at risk some very important enterprises who want to proceed on wind energy, in particular, but other alternative energy sources which we give tax benefits in this bill to proceed.”

RANGEL SAYS HE WILL PAY BACK TAXES:  Today, in a press conference, House Ways and Means Committee Chairman Rep. Charles Rangel said that he takes “full responsibility” for failure to pay taxes on income from rental property, but said it was a mistake and he will pay whatever back taxes he owes. Rangel said that he owes about $5,000 to the IRS for failing to report income on his returns and about the same amount in state and local taxes. Rangel also said that shouldn't mean he has to give up his career. Rangel said that his failure to pay taxes was “an omission that's irresponsible, and that's it. . .I don't believe that making mistakes means you have to give up your career.”

• Yesterday, House Republican leaders sent a letter to House Speaker Nancy Pelosi urging that she remove Rangel from his Ways and Means Committee Chairman's post.  The letter stated, “Given Chairman Rangel's continuing ethical lapses, he cannot effectively carry out his duties as Chairman of the Ways and Means Committee. . .Thus, in order to remove one obstacle to this Democratic Congress actually addressing and solving working families' concerns, you, as the Speaker of the House, must insist that Rep. Rangel step down from his Ways and Means chairmanship pending an investigation of his ethical lapses.”

TAX BILL INTRODUCED SEPTEMBER 9^TH:
H.R.6844 : To amend the Internal Revenue Code of 1986 to suspend the taxation of unemployment compensation for 2 years.
Sponsor: Rep McHugh, John M. [NY-23] (introduced 9/9/2008)      Cosponsors (2)

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.

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