Daily Tax Update - September 17, 2009

IRS ANNOUNCES REGULATIONS REGARDING FOREIGN INVERSION TRANSACTIONS:  In Notice 2009-78, the IRS and the Treasury Department announced their intent to issue regulations under section 7874 that will identify certain stock of a foreign corporation that is to be disregarded for determining ownership of the foreign corporation for purposes of the “Ownership Condition” in section 7874(a)(2)(B)(ii). Notice 2009-78 states that the regulations will apply to acquisitions completed on or after September 17, 2009.

Whether section 7874 applies to an acquired domestic corporation depends, in part, on the percentage of stock held by the acquired domestic corporation’s former stockholders in the acquiring foreign corporation (the “Ownership Condition”). In determining whether the Ownership Condition is satisfied, section 7874(c)(2) disregards certain stock of the acquiring foreign corporation, including, under section 7874(c)(2)(B), stock of the acquiring foreign corporation sold in a public offering related to acquisition of the domestic corporation.

• The regulations to be promulgated that are described in Notice 2009-78 will contain rules that (1) identify stock that will not be taken into account for purposes of the Ownership Condition even though the stock is not described as being sold in a public offering under section 7874(c)(2)(B), to address transactions the IRS describes as being used to avoid the application of section 7874; and (2) clarify that certain stock described in section 7874(c)(2)(B) shall be taken into account for Ownership Condition purposes when the transaction is not inconsistent with section 7874.
• The regulations will provide that stock issued in exchange for “nonqualified property” in a transaction related to the acquisition of the US business by the foreign corporation is not taken into account for purposes of the Ownership Condition, without regard to whether such stock is publicly traded on the date of issuance or otherwise.
• The term “nonqualified property” will generally mean: (1) cash or cash equivalents; (2) marketable securities as defined in section 453(f)(2); and (3) any other property acquired in a transaction with a principal purpose of avoiding the purposes of section 7874.
• Marketable securities generally shall not include stock (or a partnership interest) issued by a member of the expanded affiliated group (as defined in section 7874(c)(1)) that, after the acquisition, includes the foreign corporation, unless a principal purpose of the issuance of the stock of the foreign corporation in exchange for such property was the avoidance of the purposes of section 7874.
• The regulations will generally treat partnerships as a member of an expanded affiliated group if the partnership would be a member of the expanded affiliated group if it were a corporation.
• Notice 2009-78 includes examples that illustrate the rules concerning the Ownership Condition.
• For additional information, contact Philip R. West - pwest@steptoe.com 

CBO LOWERS COST ESTIMATE OF BAUCUS HEALTH CARE MARK: The Congressional Budget Office released its analysis of Finance Chairman Max Baucus’ health care reform plan and estimated that the gross cost of the Chairman’s Mark is $774 billion over 10 years. Yesterday, Baucus said that his plan would cost $856 billion over 10 years. In response to the new CBO estimate, Baucus released the following statement: “The Finance Committee staff does not question the CBO analysis. Both numbers are accurate, depending upon whether related policy initiatives are scored individually or combined into a net score. This $82 billion difference is principally attributable to this netting convention.” Baucus’ statement added, “Finally, the tax title contains one tax cut (cafeteria plans) that costs $4 billion. It contains 12 other provisions that raise $138 billion over 10 years. CBO nets these for offsets totaling $134 billion. The Finance Committee staff counts the $4 billion as a component of a bill that costs $856 billion and contains $138 billion in offsets.”

• Today, Ranking Finance member Charles Grassley said, “Sen. Baucus needs to be commended time after time after time for being entirely fair and entirely thorough in everything that’s gone on. Unfortunately, he’s had to move ahead — I don’t believe by his choice. I believe [he’s] being pushed by the White House and Senate leadership to move ahead, when there are still some things unresolved, and some of those are contentious things that need to be resolved. But I think they could have been resolved.”
• Today, Senate Majority Whip Dick Durbin said that he prefers a tax on wealthy Americans proposed by the House rather than a tax on the most expensive insurance “Cadillac” plans as proposed in Baucus’ plan. Durbin said, “I believe we should go outside health care for revenue and I have felt that all along. I think the House approach is better in that regard. I don’t see why we are sticking with health care for the revenue servicing exclusively.” Durbin also suggested that the Finance Committee look at increasing taxes on the foreign income of multinational corporations as an option to help pay for health reform. Durbin said, “I think you’re on the right track.  You ought to be talking to the Finance Committee.”

MUNDACA NOMINATED AS TREASURY ASSISTANT SECRETARY FOR TAX POLICY: Michael Mundaca, who has been serving as Acting Treasury Assistant Secretary for Tax Policy, has been nominated to the post by President Obama. Mundaca served in the Treasury Department during the Clinton Administration and returned to the Treasury Department in 2007, as the Deputy Assistant Secretary for International Tax Affairs.

• Also, Emily McMahon, Deputy Chief of Staff of the Joint Committee on Taxation, will become Treasury Deputy Assistant Secretary for Tax Policy. 

TAX BILLS INTRODUCED SEPTEMBER 16^TH:
H.R.3580: To amend the Internal Revenue Code of 1986 to clarify that wages paid to unauthorized aliens may not be deducted from gross income, and for other purposes.
Sponsor: Rep King, Steve [IA-5] (introduced 9/16/2009)      Cosponsors (20)

H.R.3586: To amend the Internal Revenue Code of 1986 to expand the availability of employee stock ownership plans in S corporations, and for other purposes.
Sponsor: Rep Kind, Ron [WI-3] (introduced 9/16/2009)      Cosponsors (1)

S.1678: A bill to amend the Internal Revenue Code of 1986 to extend the first-time homebuyer tax credit, and for other purposes.
Sponsor: Sen Cardin, Benjamin L. [MD] (introduced 9/16/2009)      Cosponsors (4)

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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