Daily Tax Update - May 14, 2010

IRS AND TREASURY RELEASE NOTICE ON PARTNERSHIP BLOCKERS: Today, the Treasury Department and Internal Revenue Service (“IRS”) issued Notice 2010-41, which states that they intend to issue regulations to classify certain domestic partnerships as foreign for purpose of identifying the US shareholders of a controlled foreign corporation (“CFC”) that are required to include amounts in income under Subpart F.

• In Notice 2009-7, the Treasury and IRS identified “partnership blocker” transactions as “transactions of interest.” In these transactions, a US taxpayer (“Taxpayer”) typically wholly owns two CFCs (“CFC 1” and “CFC 2”), each of which own 50% of another CFC (“CFC 3”) through a US partnership. CFC 3 earns Subpart F income. Taxpayer takes the position that it does not have income inclusion with respect to the Subpart F income because the domestic partnership is the first US person in the chain of ownership of CFC 3.
• Although the notice does not state the basis for a taxpayer’s position that the partnership blocks CFC 3’s Subpart F income, the position may be that the taxpayer does not “own” the stock of CFC 3. Under Section 958 and Treas. Reg. § 1.958-1, “stock owned” means “stock directly owned” and stock owned through foreign entities under an attribution rule. Treas. Reg. § 1.958-1(b) provides that, under this attribution rule, “since the rule applies only to stock owned by a foreign entity, attribution under the rule stops with the first United States person in the chain of ownership running from the foreign entity.” Thus, the taxpayer may argue that it does not “directly own” the stock of CFC 3 and that the US partnership, not the taxpayer, is the first US person in the chain of ownership running from CFC 3 and that ownership cannot be attributed further up the chain.
• Under Notice 2010-41 and the regulations to be issued, a domestic partnership will be treated as foreign if (1) the partnership is a US shareholder of a CFC and (2) if the partnership were treated as foreign, (a) that foreign corporation would continue to be a CFC and (b) at least one US shareholder of the CFC would be treated under section 958(a) as indirectly owning stock of the CFC and would be required to include in income Subpart F income with respect to the CFC.
• The US partnership will be treated as a US partnership for all other purposes of the Code.
• The regulations to be issued, as described in the notice, will apply to taxable years of a domestic partnership ending on or after May 14, 2010. The notice states that no inference is intended as to the treatment of a domestic partnership for any taxable year ending before May 14, 2010, but the IRS may challenge the positions taken by taxpayers with respect to such transactions, including under judicial doctrines such as sham transaction, substance over form, and economic substance.
• For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com.
• The notice can be accessed here. 

GAO RELEASES REPORT ON NONRESIDENT ALIEN FILING COMPLIANCE: Today, in response to a request from Representative Richard Neal (D-MA), Chairman of the Subcommittee on Select Revenue Measures, Committee on Ways and Means, the Government Accountability Office (“GAO”) released a report on nonresident alien compliance issues. The report describes (1) the data available on nonresident alien tax filing and compliance, (2) the type of guidance provided by the IRS to nonresident aliens and relevant third parties on filing requirements and burdens associated with filing, and (3) actions the IRS takes to enforce nonresident alien tax compliance.

The GAO recommended that:

• Congress consider raising the exemption threshold for income paid by a foreign employer and eliminating the certificate of compliance (“sailing permit”) requirement; and
• The IRS determine if creating an automated program to identify nonresident alien individuals improperly filing the Form 1040, on which improper deductions may be taken, instead of properly filing the Form 1040NR, would be a cost-effective means of improving compliance.
• For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma -avarma@steptoe.com.
• The report can be accessed here.

VAN HOLLEN: MIDDLE INCOME TAX CUTS MAY BE TEMPORARY: Yesterday, House Ways and Means Committee Member Chris Van Hollen said that the 2001 and 2003 tax cuts for middle-income earners may only be extended temporarily. Van Hollen said, “It may at the end of the day not be a permanent extension. There's a very keen interest in taking some time next year to look more broadly at the tax code.” Van Hollen outlined additional tax items that could be considered for the remainder of this session and listed the expiring tax provisions (extenders), a bank tax, small-business tax bill, energy incentives, a patch of the alternative minimum tax, and an estate tax bill. Van Hollen also said that Congress needs to reevaluate the extenders, noting that “Sometimes there's an automatic nature to this.”

IRS ISSUES SPRING 2010 STATISTICS OF INCOME BULLETIN: Today, the IRS released the spring issue of the Statistics of Income Bulletin, which features data on high-income individual income tax returns filed for tax year 2007, gift tax returns filed in 2008 and trust income from the 2002 through 2006 period. The SOI Bulletin provides a series of articles containing in-depth statistical data based on tax returns filed by individuals, corporations, tax exempt organizations, partnerships and other entities.

TAX BILLS INTRODUCED MAY 13^TH:
H.R.5306: To amend the Internal Revenue Code of 1986 to require employers to sign a statement on their income tax returns that they do not knowingly employ individuals in the United States who are not authorized to be employed in the United States.
Sponsor: Rep Emerson, Jo Ann [MO-8] (introduced 5/13/2010)      Cosponsors (None)

H.R.5311: To amend the Internal Revenue Code of 1986 to make permanent the treatment of municipal bonds guaranteed by Federal home loan banks as tax exempt bonds.
Sponsor: Rep Pascrell, Bill, Jr. [NJ-8] (introduced 5/13/2010)      Cosponsors (2)

H.R.5314: To amend the Internal Revenue Code of 1986 to provide a 15-year recovery period for nonresidential real property in rural areas.
Sponsor: Rep Smith, Adrian [NE-3] (introduced 5/13/2010)      Cosponsors (1)