Daily Tax Update - September 19, 2008

PRESIDENT BUSH – “WE MUST ACT NOW. . .”:  Today, President Bush and Treasury Secretary Henry Paulson held a joint press conference outlining several steps aimed at helping shore up the economy. Bush said,”This is a pivotal moment for America's economy. Problems that originated in the credit markets – and first showed up in the area of subprime mortgages – have spread throughout our financial system. This has led to an erosion of confidence that has frozen many financial transactions, including loans to consumers and to businesses seeking to expand and create jobs. As a result, we must act now to protect our nation's economic health from serious risk.” The President added, “This is no time for partisanship. We must join to move urgently needed legislation as quickly as possible, without adding controversial provisions that could delay action. I will work with Democrats and Republicans alike to steer our economy through these difficult times and get back to the path of long-term growth.”

• The President’s remarks can be accessed here. 
• Paulson said, “[T]his morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the US money market mutual fund industry. Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses.” Paulson continued, “The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off the flow of credit that is so vitally important to our economy. . .The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible.” The new program would cost “hundreds of billions of dollars,” according to Paulson.
• Paulson added, “I will spend the weekend working with members of Congress of both parties to examine approaches to alleviate the pressure of these bad loans on our system, so credit can flow once again to American consumers and companies. Our economic health requires that we work together for prompt, bipartisan action.” 
• Paulson’s remarks can be accessed here.   

OECD RELEASES DISCUSSION DRAFT ON BUSINESS RESTRUCTURINGS: The OECD today released a discussion draft of a proposed analysis of the transfer pricing implications of “business restructurings” within multinational corporate groups. The OECD’s study of this topic, which has been ongoing for several years, reflects concerns on the part of many governments over the popularity of “principal structures” and other arrangements in which intangibles ownership and risk-bearing within a group are contractually assigned to affiliates in low-tax jurisdictions. A great many ongoing tax examinations around the world, and pending competent authority cases, involve claims by governments that movements to principal structures, and similar arrangements, have stripped income from high-tax jurisdictions.

• The OECD discussion draft represents an attempt to reconcile two competing principles: (i) the principle that under the arm’s length standard, contracts among related entities generally must be respected, and (ii) the rule that if such contracts are not commercially reasonable, tax authorities may disregard them and substitute contractual terms that are preferable to the tax authorities. The discussion draft does not attempt to achieve an overall solution to the dilemma represented by these two principles, but instead seeks to identify factual items that will be relevant in tax examinations involving these issues.
• In the view of Steptoe attorney Michael Durst, who served on the OECD’s Business Advisory Group in connection with the study of business restructuring, “The discussion draft represents a valiant, thoughtful and high-quality attempt to bring order to a very difficult area of tax law and tax administration. Unfortunately, however, the underlying issues are so factually intensive that all that even the best analysis can do is articulate a great many factual items that a tax examination must take into account. In actual practice, it may well be impossible to conduct the kind of analysis that the discussion draft describes in anything approaching an efficient and predictable manner. Therefore, the discussion draft may, more than anything, underscore the difficulties presented by transfer pricing rules around the world today. Hopefully, the OECD will use the insights gained through this work as the basis for a probing review of the fundamental concepts underlying today’s transfer pricing rules, with the objective of a more satisfactory system.”
• The OECD is seeking comments on the discussion draft from interested parties by February 19. 
• For additional information, contact Michael C. Durst – mdurst@steptoe.com, Philip R. West – pwest@steptoe.com, or Kassim Meghjee – kmeghjee@steptoe.com

IRS ANNOUNCES UPDATE TO FREQUENTLY ASKED QUESTIONS ON LILO/SILO SETTLEMENT INITATIVE:  Today, the IRS released a detailed update to frequently-asked questions and answers on its settlement initiative for lease-in, lease-out (LILO) and sale-in, lease-out (SILO) transactions.

• For additional information, contact Arthur L. Bailey – abailey@steptoe.com, J. Walker Johnson – wjohnson@steptoe.com or  Alexis A. MacIvor – amacivor@steptoe.com

SENATE DELAYS ACTON ON TAX EXTENDERS UNTIL NEXT WEEK:  The Senate is expected to take up the tax extenders/AMT relief package next Tuesday. Senate Minority Leader McConnell said, “We're on the cusp here of a very significant piece of legislation.”

• The package is partially offset by a $25.2 billion provision that treats deferred compensation paid by “tax indifferent entities” as current income.  House Speaker Nancy Pelosi reiterated her commitment to “pay as you go” budget rules and promised only to "look at" any Senate proposal with partial offsets. Ways and Means Committee member Earl Pomeroy said, “We're not going to take a partially paid-for package of business extenders. . .If they try to jam us and dump the entire package over here and then leave town, there's a substantial risk that nothing will get done. We'll say, 'OK, we'll see you in November.'”

TAX BILLS INTRODUCED SEPTEMBER 18^TH:
H.R.6943: To amend the Internal Revenue Code of 1986 to provide for a credit for algae derived fuels, and for other purposes.
Sponsor: Rep Bilbray, Brian P. [CA-50] (introduced 9/18/2008)      Cosponsors (5)

H.R.6961: To amend the Internal Revenue Code of 1986 to allow certain public employees a deduction for distributions from governmental plans for health and long-term care insurance, and for other purposes.
Sponsor: Rep Crowley, Joseph [NY-7] (introduced 9/18/2008)      Cosponsors (None)

H.R.6969: To amend the Internal Revenue Code of 1986 to disallow the deduction for excess non-taxed reinsurance premiums with respect to United States risks paid to affiliates.
Sponsor: Rep Neal, Richard E. [MA-2] (introduced 9/18/2008)      Cosponsors (None)

H.R.6972: To amend the Internal Revenue Code of 1986 to provide for a standard home office deduction in the case of certain uses of the office.
Sponsor: Rep Ryan, Tim [OH-17] (introduced 9/18/2008)      Cosponsors (5)

S.3518: A bill to amend the Internal Revenue Code of 1986 to modify the limitations on the deduction of interest by financial institutions which hold tax-exempt bonds, and for other purposes.
Sponsor: Sen Bingaman, Jeff [NM] (introduced 9/18/2008)      Cosponsors (1)

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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