Daily Tax Update - September 3, 2009

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS FROM ITS AUGUST RECESS ON SEPTEMBER 8^TH.  

TREASURY AND THE IRS ISSUE TEMPORARY REGULATIONS TO MODIFY CONSOLIDATED RETURN ELECTION TO DEFER RECOGNITION OF INTERCOMPANY ITEMS: Today, Treasury and the IRS issued temporary regulations to modify the election under Treas. Reg. § 1.1502-13(f)(5)(ii). This election permits a consolidated group to avoid immediately taking into account an intercompany item arising from an intercompany sale of a target corporation upon the liquidation of the target into the buying member by allowing the buyer to reincorporate the target corporation. The stock in the new target (“new T”) is treated as a successor asset to the stock of the old target (“old T”), thus permitting the selling member to continue to match its intercompany item.

• The temporary regulations were issued in response to Treas. Reg. § 1.368-2(k) issued in 2007 (the “-2(k) regulations”). The -2(k) regulations treat a liquidation followed by a transfer of substantially all of the assets of the liquidated corporation as an upstream reorganization followed by a contribution rather than recharacterizing the integrated transaction as a sideways reorganization under the step transaction doctrine. The treatment prescribed by the -2(k) regulations raised concerns that an election under Treas. Reg. § 1.1502-13(f)(5) would not preserve the basis in the stock of old T, since the stock basis in new T would be determined by reference to the basis of old T's assets rather than its stock. As a result, the new T stock would not be a successor asset to the old T stock. According to the preamble of the temporary regulations, permitting an election under Treas. Reg. § 1.1502-13(f)(5) to defer the seller's intercompany gain while treating the transaction as an upstream reorganization and changing the basis of the target stock would be inconsistent with the purposes of Treas. Reg. § 1.1502-13. 
• The temporary regulations provide that, if section 332 would otherwise apply to the liquidation of the old T, and substantially all of old T’s assets are transferred to new T, and if a direct transfer of substantially all of old T’s assets to new T would qualify as a reorganization, then the liquidation of old T and the transfer of its assets will be treated as a sideways reorganization for all Federal income tax purposes. 
• The temporary regulations are generally effective for transactions in which T’s liquidation occurs on or after October 25, 2007, which is the effective date of the -2(k) regulations.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com
• The regulations can be accessed via: http://www.steptoe.com/publications/2009-21323_PI.pdf and http://www.steptoe.com/publications/2009-21324_PI.pdf

IRS ISSUES GUIDANCE ON LATE ENTITY CLASSIFICATION ELECTIONS: Today, the IRS issued Rev. Proc. 2009-41, which provides guidance with respect to eligible entities seeking relief to file late entity classification elections under the “check-the-box” regulations.

• Rev. Proc. 2002-59 previously provided guidance for newly formed entities to request relief for a late initial classification election filed by the due date for the first federal tax return of the entity’s desired classification for the year of the entity’s formation.
• Rev. Proc. 2009-41 supersedes Rev. Proc. 2002-59 by extending late entity classification relief to both initial classification elections and changes in classification elections. The revenue procedure also extends the time for filing late entity classification elections to within 3 years and 75 days of the requested effective date of the eligible entity’s classification.
• Rev. Proc. 2009-41 provides the requirements that an entity must meet to be eligible for relief under the guidance for a late classification election and the procedural requirements for requesting such relief.
• For entities that satisfy the requirements provided in Rev. Proc. 2009-41, the revenue procedure is the exclusive means for obtaining relief for a late entity classification election. An entity that does not satisfy the requirements for relief under Rev. Proc. 2009-41 may request relief by applying for a letter ruling. 
• The revenue procedure is effective September 28, 2009, and applies to all pending requests on that date. With respect to pending letter ruling requests, an entity may withdraw its letter ruling request and receive a refund of its user fee. However, the National Office will process letter ruling requests pending on September 28, 2009, unless, prior to the earlier of November 12, 2009, or the issuance of the letter ruling, the entity notifies the IRS that it will rely on Rev. Proc. 2009-41 and withdraw its letter ruling request.  
• For additional information, contact: Mark J. Silverman - msilverman@steptoe.com, Philip R. West - pwest@steptoe.com, Lisa M. Zarlenga - lzarlenga@steptoe.com, or Aaron P. Nocjar -   anocjar@steptoe.com
• The revenue procedure can be accessed here. 

MISCELLANEOUS GUIDANCE ISSUED TODAY:
Revenue Procedure 2009-41 provides guidance with regard to eligible entities seeking relief to file late classification elections.  Generally, the revenue procedure provides late relief if the request is filed within 3 years and 75 days of the requested effective date of the eligible entity’s classification. The revenue procedure also provides guidance for those eligible entities that do not qualify for relief under this revenue procedure.  

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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