Daily Tax Update - September 25, 2009

TREASURY AND IRS BOOTSTRAP LITIGATION POSITION BY ISSUING REGULATIONS REDEFINING THE DEFINITION OF AN OMISSION FROM GROSS INCOME:  Treasury and the IRS have issued temporary regulations that redefine an omission from gross income for purposes of the six-year minimum period for assessment of tax attributable to partnership items and the six-year period for assessing tax. The temporary regulations attempt to resolve whether an overstatement of basis in a sold asset results in an omission from gross income. The text of the temporary regulations also serves as the text of simultaneously issued proposed regulations.

• Section 6229(c)(2) provides that, if a partnership omits from gross income an amount that is in excess of 25 percent of the amount of gross income stated in its return, the period for assessing tax attributable to its partnership items is extended to 6 years. This language is identical to the language used in section 6501(e), which extends the assessment period to 6 years for taxpayers that omit from gross income an amount that is in excess of 25 percent of the amount of gross income stated in the return. Unlike in section 6501(e), an omission from gross income is not further defined in section 6229(c). The temporary regulations take the position that section 6501(e)(1)(A) defines an omission from gross income both for purposes of section 6501 and section 6229. 

• The temporary regulations state that, with respect to any income other than from the sale of goods or services in a trade or business, "gross income" has the same meaning as provided under section 61(a), and such term includes the total of the amounts received or accrued, to the extent required to be shown on the return. The temporary regulations further state that, accordingly, any basis overstatement that results in an understatement of gross income under section 61(a) constitutes an omission from gross income for purposes of sections 6501(e)(1)(A) and 6229(c)(2).

• In the preamble to the temporary regulations, Treasury and the IRS take the position that the temporary regulations are entitled to deference notwithstanding that their interpretation is contrary to recent court decisions which have held that, in cases outside the trade or business context, an omission does not occur by an overstatement of basis.

• The temporary regulations also provide that the adequate disclosure exception to the six-year statute of limitations applies to omissions from gross income resulting from basis overstatements in the same manner as it applies to other omissions from gross income.

• The temporary regulations apply to taxable years with respect to which the applicable period for assessing tax did not expire before September 24, 2009. 

• For additional information, contact: -Matthew D. Lerner - mlerner@steptoe.com  or  Aaron P. Nocjar - anocjar@steptoe.com

• The regulations can be accessed here and here.  

Treasury and IRS Issue Final Regulations on Interest Deduction of Foreign Corporations Operating U.S. Branches:  Today, in T.D. 9465, the Treasury Department and IRS issued final regulations under section 882(c), updating the rules for determining the interest expense deduction of foreign corporations that operate branches in the United States. 

• The final regulations generally adopt proposed regulations (REG-120509-06) that were published in August 2006. Like the proposed regulations, the final regulations increase the "fixed ratio" that foreign banks may use to determine the amount of interest that may be deducted by their U.S. branches, from 93% to 95%. 

• The final regulations also implement guidance provided in Notice 2005-53, which concerned the interaction of Treas. Reg. § 1.882-5 and U.S. income tax treaties that permit taxpayers to determine the attribution of business profits to a permanent establishment by analogy to the 1995 OECD Transfer Pricing Guidelines. The final regulations make clear that, unless a tax treaty specifically authorizes a different approach, taxpayers must follow the regulations.

• The Preamble to the final regulations states that the Treasury and IRS received comments regarding the interaction of Treas. Reg. § 1.882-5 and certain financial transactions, including effectively connected sale-repurchase agreements, securities lending transactions, and interbranch activities. The Preamble states that the Treasury and IRS continue to study these issues and "intend to coordinate these issues, where appropriate, with similar issues in analogous contexts, such as global dealing operations and section 864(e)."

• The final regulations are generally effective for taxable years ending on or after August 15, 2009. Taxpayers may choose to apply the prior temporary regulations, however, for any taxable year beginning on or after August 16, 2008 but before August 15, 2009.

• For additional information, contact: Philip R. West - pwest@steptoe.com

• The regulations can be accessed here.

WHITE HOUSE SEEKS INPUT ON TAX REFORM:  President Obama has asked the President's Economic Recovery Advisory Board (PERAB) to develop options for tax reform. The members of the tax subcommittee are preparing ideas to be considered by the board and would like to give anyone a chance to have input into the process on this important issue. Anyone wanting to share ideas and opinions for consideration by the subcommittee can do so. The deadline for submissions is October 15th, 2009.

• Additional information can be accessed here. 

FINANCE TO BEGIN WORK ON HEALTH CARE FINANCING AMENDMENTS NEXT WEEK:  The Senate Finance Committee will begin consideration of amendments related to the financing section of the health care reform bill on Tuesday. Today, Finance Chairman Baucus was optimistic that the Committee was making progress. Baucus said, "We have debated, we have questioned, we have prodded at times, and we have discussed -- and discussed. Most important, we continue to move forward."

TAX BILLS INTRODUCED SEPTEMBER 24^TH:

H.R.3640: To amend the Internal Revenue Code of 1986 to extend and expand the first-time homebuyers credit and to provide a loss deduction on the sale of a principal residence.
Sponsor: Rep Childers, Travis [MS-1] (introduced 9/24/2009) Cosponsors (1)

H.R.3641: To amend the Internal Revenue Code of 1986 to expand the military housing allowance exclusion for purposes of determining area gross income in determining whether a residential rental property is a qualified residential rental property for purposes of the exempt facility bond rules.
Sponsor: Rep Nye, Glenn C., III [VA-2] (introduced 9/24/2009) Cosponsors (None)

S.1711: A bill to amend the Internal Revenue Code of 1986 to provide tax incentives for making homes more water-efficient, for building new water-efficient homes, for public water conservation, and for other purposes.
Sponsor: Sen Reid, Harry [NV] (introduced 9/24/2009) 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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