Daily Tax Update - February 01, 2006

PRESIDENT URGES CONGRESS TO MAKE TAX CUTS PERMANENT:
Last night, in the President’s State of the Union remarks, President Bush stressed the importance of extending the tax cuts to continue economic growth. The President said, "Keeping America competitive begins with keeping our economy growing.  And our economy grows when Americans have more of their own money to spend, save, and invest.  In the last five years, the tax relief you passed has left $880 billion in the hands of American workers, investors, small businesses, and families -- and they have used it to help produce more than four years of uninterrupted economic growth.  Yet the tax relief is set to expire in the next few years.  If we do nothing, American families will face a massive tax increase they do not expect and will not welcome. Because America needs more than a temporary expansion, we need more than temporary tax relief.  I urge the Congress to act responsibly, and make the tax cuts permanent."

  • The speech can be accessed here

REASONABLE CAUSE STANDARD FOR LATE FILINGS UNDER THE DUAL CONSOLIDATED LOSS RULES EFFECTIVE PRIOR TO FINALIZATION OF PROPOSED REGULATIONS:
This week, the IRS issued Notice 2006-13, which generally allows taxpayers to avoid late filings of agreements, statements, rebuttals, requests, or other information required by the dual consolidated loss ("DCL") rules under the reasonable cause standard prescribed in proposed regulations issued on May 24, 2005 (the "2005 Proposed Regulations) prior to the finalization of those regulations.

  • A taxpayer may be required under the DCL rules to attach to a timely filed tax return an agreement, statement, rebuttal, request or other information for various reasons, among the more important of which is a so-called "(g)(2) agreement." In general, a valid (g)(2) agreement allows a taxpayer to utilize a DCL and includes a certification that the DCL has not been and will not be used to offset income of another person under the laws of a foreign country.
  • A taxpayer can currently avoid a late filing of these agreements, statements, rebuttals, requests, or other information by requesting an extension of time under Treas. Reg. §§ 301.9901-1 through 3. The 2005 Proposed Regulations grant relief for taxpayers seeking to avoid late filings by providing for a reasonable cause standard, pursuant to which the taxpayer demonstrates that the failure to timely file was due to reasonable cause and not willful neglect. Notice 2006-13 generally allows taxpayers to utilize this reasonable cause standard effective as of March 23, 2006, in lieu of requesting an extension of time under Treas. Reg. §§ 301.9901-1 to 3.
  • It is important to note that Notice 2006-13 does not, however, extend the reasonable cause standard to untimely requests for a closing agreement, which allows a taxpayer to avoid gain recognition on certain triggering events. Notice 2006-13 states that the IRS and Treasury intend that the reasonable cause standard contained in the final regulations will be consistent with that contained in the 2005 Proposed Regulations and Notice 2006-13 and that, upon finalization, the reasonable cause standard will prospectively supersede the relief under Treas. Reg. §§ 301.9901-1 to 3.

DIVIDED TAX COURT INVALIDATES REG AND HOLDS THAT A FOREIGN CORPORATION'S ENTITLEMENT TO DEDUCTIONS AND CREDITS IS NOT CONDITIONED ON TIMELY FILING OF TAX RETURN:
The Tax Court held on January 26, 2006, in Swallows Holding, Ltd. v. Commissioner that section 882(c)(2), which conditions the ability of a foreign corporation to claim deductions and credits on the filing of a tax return, does not require the timely filing of the tax return. The Tax Court further ruled that final regulations issued in 1990 (the "1990 Regulations") were void to the extent the regulations conflicted with the court's holding. The ruling is significant for, among others, foreign corporations that are unexpectedly determined to have had, in a prior year, a U.S. permanent establishment (or to determined to have been engaged in a U.S. trade or business, for those corporations not resident in a treaty jurisdiction).

  • Section 882(c)(2) states that a foreign corporation is entitled to deductions and credits only if the foreign corporation files "a true and accurate return in the manner prescribed by subtitle F."
  • The taxpayer in Swallows Holding filed four tax returns in 1999 for taxable years 1993, 1994, 1995 and 1996, three of which were used by the taxpayer to claim deductions for taxes and licenses paid with respect to U.S. real property. The IRS challenged the deductions claimed by the taxpayer on the basis of the 1990 Regulations, which generally required the taxpayer to file a tax return within 18 months after the taxable year covered by the return in order to claim such deductions.
  • The taxpayer challenged the IRS position on the basis that the timeliness component in the 1990 Regulations was invalid as inconsistent with the language of section 882(c)(2). The majority agreed with the taxpayer and held that 1990 Regulations were invalid to the extent the disputed regulations prescribed for a timely filing requirement. In reaching its decision, the majority stated that the plain meaning of section 882(c)(2) was unambiguous in that the phrase "in the manner prescribed by Subtitle F" did not include a timeliness component. Among other considerations, the majority relied on the long statutory history of section 882(c)(2); prior versions of the statute were substantively identical to the current versions and were reenacted by Congress while the courts repeatedly rejected the IRS position that the rule contained a timeliness component.
  • Three dissenting judges, in three separate opinions, were of the view that the timeliness component contained in the 1990 Regulations was a lawful and reasonable interpretation of section 882(c)(2).

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