Daily Tax Update - November 5, 2008

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS NOVEMBER 17^TH.

CHANGE HAS COME—OBAMA WINS AND DEMOCRATS MAKE BIG GAINS IN CONGRESS:  Sen. Barack Obama made history yesterday with his election as the nation's 44th President. The President-Elect said, “If there is anyone out there who still doubts that America is a place where all things are possible, who still wonders if the dream of our founders is alive in our time, who still questions the power of our democracy, tonight is your answer. . .The road ahead will be long. Our climb will be steep. We may not get there in one year or even one term, but America, I have never been more hopeful than I am tonight that we will get there. I promise you: We as a people will get there.”

• For the first time in 8 years, a Democrat has been elected President and as expected, the Democrats picked up a significant number of seats in the House and Senate. Although the Democrats fell short of the filibuster-proof 60-vote majority in the Senate they had hoped for, enough moderate Republicans are likely to vote with the Democrats to advance key parts of their agenda. And, with a Democratic president and the threat of a Republican filibuster in the Senate greatly removed, Democrats are less likely to craft bipartisan legislation.
• Democrats picked up approximately 20 seats in the House and at least five seats in the Senate. As of this moment, the projected ratios in the House are 254 - 173 and 56 - 40 and 2 Independents in the Senate. There are several Congressional races still up in the air.
• In the Senate, Democrats picked up at least five seats now held by Republicans. Democrats secured seats in Colorado, New Mexico, North Carolina, and Virginia, as well as New Hampshire. 
• The outcome in at least three races for Republican Senate seats—Georgia, Minnesota, and Oregon—remains unclear. There may be a December runoff in Georgia for the Senate seat currently held by Sen. Saxby Chambliss. It appears that Sen. Ted Stevens (R-AK) is leading his race.
• Three members of the tax-writing committees lost their re-election bids. House Ways and Means Committee members Phil English (R-PA) and Rep. Jon Porter (D-NV) and Senate Finance Committee member Sen. John Sununu (R-NH) failed to gain re-election. It appears likely that Finance Committee member Gordon Smith (R- OR) will not be re-elected, while Ways and Means member Reps. Patrick Tiberi (R-OH) is expected to win his race. Additionally, the seat held by Rep. Rahm Emanuel (D-IL) would become open if he accepts an offer to be President-Elect Obama's chief of staff. It has been reported that Emanuel has accepted the offer to serve as chief of staff.
• It is probable that the ratio of Democrats and Republicans on the tax-writing committees will change for the 111^th Congress due to the number of seats gained by Democrats. Committee assignments will likely be announced in January. There are currently 11 Democrats and 10 Republicans on Senate Finance Committee and the House Ways and Means Committee currently has 24 Democrats and 17 Republicans. 
• Democrats are expected to gain one seat on the Finance Committee. Defeated Finance Committee member Sen. John Sununu’s (R-NH) seat is unlikely to be replaced. Sens. Tom Carper (D-DE), Benjamin Cardin (D-MD), and Evan Bayh (D-IN) are among those who have expressed interest in a seat on the Finance Committee.
• On the Ways and Means Committee, the ratio of Democrats to Republicans could change to 25-16.
• There is also expected to be some turnover in the House and Senate leadership offices. Democratic Caucus Chairman Rahm Emanuel is the front-runner to become Obama’s chief of staff. House and Senate minority leadership officials are expected to face a challenge among Republicans in their ranks due to the many seats lost by Republicans.
• The complete election results can be accessed in the chart via The Washington Post or CNN. 

ANTICIPATED CHANGES IN TREASURY AND TAX POLICY: Among the names being floated as the possible Treasury Secretary in the upcoming Obama Administration include: frontrunner former Clinton Treasury secretary Larry Summers; New Jersey Governor Jon Corzine; Timothy Geithner, the President of the Federal Reserve Bank of New York; former Fed Chairman Paul Volcker; former Clinton Treasury Secretary Robert Rubin; New York City Mayor Michael Bloomberg and FDIC Chairwoman Sheila Bair. Obama has spoken favorably about investor Warren Buffett as well.

• Yesterday, Treasury Secretary Hank Paulson's top deputies, including assistant secretaries, under secretaries and other Senate-confirmed positions, announced that they have agreed to remain in their jobs at Treasury through January 20 to assist in the presidential transition. 
• The cornerstone of Obama’s tax plan is his pledge not to raise taxes for families making under $250,000 a year and to make the tax system more progressive. Obama said that his tax plan, “delivers broad-based tax relief to middle class families and cuts taxes for small businesses and companies that create jobs in America, while restoring fairness to our tax code and returning to fiscal responsibility.” According to the Obama campaign, his tax policy plan would:
  • Cut taxes for 95 percent of workers and their families with a tax cut of $500 for workers or $1,000 for working couples.
  • Provide generous tax cuts for low- and middle-income seniors, homeowners, the uninsured, and families sending a child to college or looking to save and accumulate wealth.
  • Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of healthcare and to reward investments in innovation.  
  • Dramatically simplify taxes by consolidating existing tax credits, eliminating the need for millions of senior citizens to file tax forms, and enabling as many as 40 million middle-class Americans to do their own taxes in less than five minutes without an accountant.
  • Middle class families will see their taxes cut—and no family making less than $250,000 will see their taxes increase.
  • Families making more than $250,000 will pay either the same or lower tax rates than they paid in the 1990s.
• Obama’s plan will cut taxes overall, reducing revenues to below the levels that prevailed under Ronald Reagan.
• Additional information on Obama’s tax plan can be accessed here.

IRS PROVIDES GUIDANCE FOR AUDITING CASCADING FET:  On October 24, 2008, the IRS released a Directive providing guidance to examiners auditing those taxpayers participating in the voluntary compliance initiative set out in Announcement 2008-18. That initiative relates to the excise tax (FET) on policies issued by foreign insurers. The voluntary compliance initiative was issued to encourage foreign insurers, reinsurers, and other agents, solicitors, and brokers to comply with their FET obligations, particularly the obligations described in Revenue Ruling 2008-15 for cascading FET (e.g., FET on a premium for insurance of a US risk and a second FET on a premium for reinsurance of that same risk).

• The taxpayers addressed in the Directive are foreign insurers and reinsurers not engaged in a US trade or business, as well as non-US resident agents and brokers. The Directive may be relevant to the brokers themselves as well as their customers.
• If the taxpayer receives premiums from a US insured with respect to US risks or pays premiums to a foreign reinsurer with respect to US risks, to obtain the benefits of the voluntary compliance initiative, the taxpayer must, for tax periods beginning October 1, 2008 through December 31, 2008, report those transactions to the IRS quarterly on a Form 720, maintain records thereof, and pay the amount of tax due.
• If the taxpayer receives premiums on which the US insured paid FET, that taxpayer does not need to pay FET on the premiums received from the US insured; the taxpayer must maintain documentation to support the payment of the FET. See Directive example 1.
• If the taxpayer has no contractual relationship with the US insured, it need not pay FET; to obtain the benefits of the voluntary compliance initiative, the taxpayer must file a blank Form 720. While the taxpayer need not pay the FET to obtain the benefits of the voluntary compliance initiative, participation in the initiative does not precluded the IRS from assessing the taxpayer for the FET that the US insured has failed to pay. See Directive example 3.
• Although the Directive states that the IRS should not collect FET from more than one person regarding the same policy, the examples make clear that this does not mean that the IRS should not collect cascading FET. Such cascading FET is specifically permitted and contemplated by the Directive. See Directive example 2.
• In part to deal with computational difficulties (but not to alleviate cascading FET), the Directive allows taxpayers to use a formula to determine what part of the reinsurance premiums paid is attributable to US risks and therefore potentially subject to FET. Specifically, the formula allows taxpayers to pay FET on the portion of the total reinsurance premiums paid equal to the ratio of insurance and reinsurance premiums received for US risks compared to total insurance and reinsurance premiums received. See Directive example 5.
• The Directive tells examiners that they should encourage taxpayers to submit and discuss methods for calculating FET on transactions described in the Revenue Ruling 2008-15 and should encourage taxpayers to enter into Closing Agreements with the IRS to help provide protection from FET to their policy holders.
• For additional information, contact Philip R. West - pwest@steptoe.com or Stanley Smilack - ssmilack@steptoe.com

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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