Daily Tax Update - October 29, 2009

IRS AND TREASURY ISSUE FINAL REGULATIONS ON REDUCTION OF TAX ATTRIBUTES FOR S CORPORATIONS THAT EXCLUDE INCOME UNDER SECTION 108(a):  The IRS and Treasury have issued final regulations that provide guidance on the manner in which an S corporation reduces its tax attributes under section 108(b) for taxable years in which the S corporation excludes discharge of indebtedness income from gross income under section 108(a).  The final regulations generally retain the provisions of proposed regulations published in August 2008.  The final regulations apply to discharges of indebtedness occurring on or after October 30, 2009.

• The final regulations adopt a different approach than the proposed regulations for determining the character of the amount of the S corporation’s excess deemed NOL that is allocated to a shareholder.  Under this approach, the S corporation’s excess deemed NOL that is allocated to a shareholder consists of a proportionate amount of each item of the shareholder’s loss or deduction that is disallowed for the taxable year of the discharge under section 1366(d)(1).
• The final regulations modify the shareholder-information reporting requirements in the proposed regulations to minimize the dependence on shareholders who fail to furnish information or provide information that is incorrect.  The final regulations provide that, in certain situations, the S corporation may rely on its own books and records, as well as other information available to the S corporation, to determine a shareholder’s disallowed losses or deductions under section 1366(d)(1), provided the S corporation knows that the amount reported by the shareholder is inaccurate or the information as provided appears to be incomplete or inaccurate.
• In response to comments received on the proposed regulations, the final regulations add an example clarifying how the allocation rules in Treas. Reg. § 1.108-7(d)(2) apply when a terminating election under section 1377(a)(2) is made. 
• The preamble to the final regulations confirms that:  (1) a deemed NOL does not include losses suspended under sections 465 or 469; (2) section 108(d)(7)(B) applies to any shareholder, including a shareholder that is an employee stock ownership plan, that has disallowed losses and deductions for the taxable year of the discharge under section 1366(d)(1); (3) noncapital expenses that reduce basis under section 1367(a)(2)(D) are not included as disallowed losses and deductions under section 1366(d)(1) for purposes of section 108(d)(7(B); and (4) a shareholder’s disallowed losses and deductions under section 1366(d)(1) are determined for section 108(d)(7) purposes as of the close of the S corporation’s taxable year.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com, Lisa M. Zarlenga - lzarlenga@steptoe.com or Aaron P. Nocjar - anocjar@steptoe.com 

HOUSE HEALTH BILL CONTAINS TAX ON HIGH-INCOME EARNERS ALONG WITH ADDITIONAL OFFSETS:  Today, House Democratic leaders released their revised health care reform bill. The bill includes a public insurance option with negotiated provider payment rates, rather than the “robust” public option plan previously advocated. The main revenue raiser for the approximately $900 million bill is a surtax on households earning more than $500,000 per year. 

• Additional revenue offsets in the bill include:  a 2.5-percent excise tax on medical devices sold for use in the United States, mandatory information reporting on payments made in the course of a trade or business to a corporation, a nine-year delay until Dec. 31, 2019 in the application of worldwide allocation of interest, a limitation on treaty benefits for certain deductible payments, codification of the economic substance doctrine, and the addition of a “more likely than not” standard for tax penalties on underpayments by certain large or publicly traded persons.
• The text of the revenue offsets in the bill can be located on page 336 of this document.

TAX BILLS INTRODUCED OCTOBER 28th:
H.R.3952: To amend the Internal Revenue Code of 1986 increase the amount allowable as a deduction for meals and entertainment expenses of small businesses.
Sponsor: Rep Titus, Dina [NV-3] (introduced 10/28/2009)      Cosponsors (6)

H.R.3953: To amend the Internal Revenue Code of 1986 to expand the work opportunity tax credit to include long-term unemployed individuals.
Sponsor: Rep Boccieri, John A. [OH-16] (introduced 10/28/2009)      Cosponsors (1)

H.R.3958: To amend the Internal Revenue Code to provide for a refundable tax credit for heating fuels.
Sponsor: Rep Hodes, Paul W. [NH-2] (introduced 10/28/2009)      Cosponsors (None)

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.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.

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