Daily Tax Update - March 24, 2010

SENATE TO BEGIN VOTING ON SCORES OF RECONCILIATION AMENDMENTS IN “VOTE-A-RAMA” – REID CONFIDENT BILL WILL PASS UNCHANGED:  Later today, the Senate will begin voting on dozens of amendments to the health care reconciliation bill (The Health Care and Education Affordability Reconciliation Act of 2010 -- H.R. 4872).  If any amendments are adopted by the Senate to the House-passed reconciliation bill, the House will have to vote on it again.  It is unclear when a vote on final passage will occur in the Senate since reconciliation rules allow 20 hours of debate and an unlimited number of amendments that can be offered.  A Senate Republican aide said that Republican amendments could exceed the record number voted on in a “vote-a-rama,” which was 54.

• Today, Senate Majority Leader Harry Reid said, “We feel very comfortable and confident that we have scrubbed this bill. We have worked tirelessly with...budget staff, CBO, Parliamentarian, so we feel comfortable with where we are.” Reid expressed confidence that there would be 51 votes against all Republican amendments. Reid said, “All the amendments we’ll take care of.” However, Reid said that Republicans may find some provisions that fall outside the budget reconciliation rules. Reid said, “The points of order, we’ll see what they do.”
• However, Senate Budget ranking member Judd Gregg said that Reid may be overly optimistic and said that the “vote-a-rama” would “go on awhile. You can assume that.”
• House Majority Leader Steny Hoyer said yesterday, “I don't expect there to be changes, but if there were changes...our members are prepared to vote [again] before they leave.”
• Meanwhile, Republicans continue to try to amend the bill and block its passage. Senate Minority Whip Jon Kyl said, “I think we want to have a number of amendments that will highlight deficiencies in the bill to educate the American people as to the problems in it, give Democrats an opportunity to correct some of them. There's been no determination of how many amendments. We probably have a lot more amendments in our minds or drafted than we're ever going to end up offering.”
• Senate Minority Leader Mitch McConnell said, “I think it’s still important that Democrats have committed to the House Democrats that they’ll pass this bill that has even greater Medicare cuts, even greater tax increases—even more special deals. I think the American people need to focus on this second bill as well. We’re going to treat it as a serious legislative exercise, and will have, as Sen. [Judd] Gregg indicated, a number of amendments that are important that people go on record on.” McConnell has also vowed to make the health care reform bill a centerpiece of the midterm elections. McConnell said, “Repeal and replace will be the slogan for the fall.”
• On Monday, Sen. John McCain expressed frustration with the health care process and said that Republicans wouldn’t cooperate with Democrats for the rest of the year. McCain said, “There will be no cooperation for the rest of the year. They have poisoned the well in what they've done and how they've done it.” Yesterday, McCain clarified his remarks, “Look, let me just clarify that. If it's in the national interest and there's something that requires us to work together—a national emergency, something that we think will help the country—sure.” McCain added, “What I meant was, for us to sit down together and say gee, how can we get something accomplished? We'll just wait until after the election.”

FEDERAL CIRCUIT AFFIRMS DECISION IN JADE TRADING CASE ON ECONOMIC SUBSTANCE; VACATES AND REMANDS DECISION AS TO PENALTIES: The US Court of Appeals for the Federal Circuit has partially affirmed the decision by the Court of Federal Claims in Jade Trading LLC v. United States, 80 Fed. Cl. 11 (2007). The case involved a so-called Son-of-BOSS (bond option sales strategy) transaction.

• The Federal Circuit affirmed the finding of the Court of Federal Claims that the contributions of the spread transactions to the Jade partnership lacked economic substance and should be disregarded for tax purposes. The court relied on the principles established in Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006) for purposes of conducting its economic substance analysis.
• The court agreed with the determinations made by the Court of Federal Claims, noting that the loss generated was “purely fictional,” the formation of the Jade partnership had no economic purpose, the spread transaction was virtually guaranteed to be unprofitable, and the transaction was developed as a tax avoidance scheme and not an investment strategy.
• The court also rejected the argument that the contribution of the spread transactions to the Jade partnership had economic substance because the spread strategy options were separate assets with separate documentation that were owned by unrelated parties. The court agreed with the finding by the Court of Federal Claims that the transactions could not be separated because they were totally dependent on one another from an economic and pragmatic standpoint.
• The Federal Circuit also held that, because a partner’s outside basis was an affected item and not a partnership item, the Court of Federal Claims lacked jurisdiction to decide whether valuation misstatement penalties applied based on the partners’ outside bases in the Jade partnership.
• However, because it was possible that at least some portion of the penalties could have been computed without relying on the partners’ outside bases, the court concluded that the penalty issue should be vacated and remanded for further proceedings.
• The court also vacated the portion of the lower court’s judgment that concluded that partner-level defenses could not be brought in a partnership-level proceeding.
• For additional information, contact Mark J. Silverman - msilverman@steptoe.com, Matthew D. Lerner - mlerner@steptoe.com, or Aaron P. Nocjar - anocjar@steptoe.com.
• The decision can be accessed here. 

HOUSE PASSES SMALL BUSINESS JOBS PACKAGE: Today, the House passed its $20 billion small business jobs package (H.R. 4849 - The Small Business and Infrastructure Jobs Tax Act of 2010). The vote was 246-178.

• The bill includes (1) a 100-percent exclusion of capital gains taxes for small businesses, (2) an extension of Build America Bonds, (3) excluding bonds that finance facilities furnishing water and sewage from state volume caps, and (4) a provision allowing the new markets tax credit to be claimed against the alternative minimum tax with respect to qualified investments made between March 15, 2010 and January 1, 2012.
• The bill’s offsets include: (1) a limitation on treaty benefits for certain deductible payments, (2) modifying the treatment of securities of a controlled corporation exchanged for assets in certain reorganizations, (3) repealing special rules for interest and dividends received from persons meeting the 80-percent foreign business requirements, (4) increased reporting on expenses related to rental property, (5) a clarification that current law allowing the IRS to levy 100 percent of any payment due to a vendor for goods or services sold or leased to the federal government would include payments made for the sale or lease of real estate and other types of property not considered “goods or services,” and (6) excluding a highly corrosive waste by product of the paper manufacturing process, known as crude tall oil, from qualifying for the $1.01 per gallon cellulosic biofuel tax credit.
• A summary of the bill can be accessed here. 
• A text of the manager’s amendment to the bill can be accessed here. 

TAX BILLS INTRODUCED MARCH 23rd:
H.R.4915: To amend the Internal Revenue Code of 1986 to extend the funding and expenditure authority of the Airport and Airway Trust Fund, to amend title 49, United States Code, to extend authorizations for the airport improvement program, and for other purposes.
Sponsor: Rep Oberstar, James L. [MN-8] (introduced 3/23/2010)      Cosponsors (5)

S.3157: A bill to amend the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 to allow time for pensions to fund benefit obligations in light of economic circumstances in the financial markets of 2008, and for other purposes.
Sponsor: Sen Casey, Robert P., Jr. [PA] (introduced 3/23/2010)      Cosponsors (3)

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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