Daily Tax Update - August 18, 2006

The Daily Tax Update will be published on a periodic basis until Congress returns from its August recess on September 6, 2006.

Today, the IRS and Treasury Department issued proposed regulations that clarify the treatment of expenditures incurred in selling, acquiring, producing or improving tangible assets. According to the IRS, "The proposed regulations provide an overall framework that expands the standards in the current regulations by drawing on principles developed through case law. Specifically, the proposal provides exclusive factors for determining whether amounts paid to restore property to its former working condition must be capitalized as an improvement. The proposed regulations also provide guidance concerning the economic useful life of a unit of property and activities that substantially prolong the economic useful life. Additionally, the proposed regulations provide rules for determining the appropriate unit of property to which the rules should be applied. To reduce the administrative and compliance costs associated with this section of the tax code, the proposed regulations provide several safe harbors and simplifying assumptions. Although the proposed regulations do not provide a de minimis rule in which small cost items are exempt from capitalization, the preamble solicits comments on whether such a rule should be adopted in final regulations."

  • The regulations can be accessed here.

On August 17, President Bush signed the Pension Protection Act of 2006. The President called the bill the "most sweeping reform of America's pension laws in over 30 years."

  • President Bush said, "The Pension Protection Act of 2006 will help shore up our pension insurance system in several key ways. It requires companies who underfund their pension plans to pay additional premiums. It extends the requirement that companies that terminate their pensions must provide extra funding for the system. This legislation insists that companies measure their obligations of their pension plans more accurately. It closes loopholes that allow underfunded plans to skip pension payments. It raises caps on the amount that employers can put into their pension plans so they can add more money during good times and build up a cushion that can keep pensions solvent in lean times. Finally, this legislation prevents companies with underfunded pension plans from digging the hole deeper by promising extra benefits to their workers without paying for those promises up front. The problem of underfunded pensions will not be eliminated overnight. This bill establishes sound standards for pension funding, yet, in the end, the primary responsibility rests with employers to fund the pension promises as soon as they can." The President added, "In addition to reforming the laws governing traditional private pensions, the bill I signed today also contains provisions to help workers who save for retirement through defined contribution plans like IRAs and 401(k)s. These savings plans are helping Americans build a society of ownership and financial independence. And this legislation will make it easier for workers to participate in these plans. It will remove barriers that prevent companies from automatically enrolling their employees in these savings plans, ensure that workers have more information about the performance of their accounts, provide greater access to professional advice about investing safely for retirement, and give workers greater control over how their accounts are invested. Finally, this bill makes permanent the higher contribution limits for IRAs and 401(k)s that we passed in 2001, and that will enable more workers to build larger nest eggs for retirement."
  • A summary of the new pension law prepared by attorneys in Steptoe & Johnson LLP's Employee Benefits Group can be accessed here.
  • For additional information, contact Anne E. Moran - amoran@steptoe.com, Ellen Kohn - ekohn@steptoe.com, Donald E. Wellington - dwellington@steptoe.com or any member of our Employee Benefits Group.

Yesterday, the IRS announced that it had reached an agreement with the Academy of Motion Picture Arts and Sciences regarding the taxability of gift bags and promotional items. According to the IRS, "Under the closing agreement, the Academy and the IRS have settled the tax obligations with respect to gifts given through 2005. Recipients of this year's gift basket will be issued appropriate informational tax forms by the Academy and will be responsible for satisfying their income tax obligations."

  • IRS Commissioner Mark Everson said, "We appreciate the Academy's leadership on this issue. The gift basket industry has exploded, and it's important that the groups running these events keep in mind the tax consequences." Everson added, "There's no special red-carpet tax loophole for the stars. Whether you're popping the popcorn, sitting in the audience or starring on the big screen, you need to respect the law and pay your taxes."
  • Additional information can be accessed here.

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 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