Daily Tax Update - March 08, 2005

Proposed Regulations Would Permit Cross-Border "A" Reorganizations for the First Time in 70 Years
In an article to be published in the Tax Executives Institute’s February-March journal, the authors, Mark Silverman, Lisa Zarlenga, and John Giles of Steptoe & Johnson LLP discuss recently proposed amendments to Treas. Reg. § 1.368-2 that would expand the definition of "statutory merger" to include certain mergers effected pursuant to the laws of a foreign country or a United States territory in addition to the laws of the United States, a State, or the District of Columbia. The proposed amendments also remove the limitations in the current temporary regulations on the ability of a target corporation to merge into a foreign corporation or disregarded entity. 

  • Section 368(a)(1)(A) provides that the term "reorganization" includes "a statutory merger or consolidation." Since 1935, this term has been defined to exclude mergers under foreign law. However, there has never been any strong policy support for this rule.
  • Even though the proposed amendments would treat certain mergers effected pursuant to foreign law as statutory mergers, these mergers would still need to satisfy the same US requirements as domestic mergers, namely that the merged entity must transfer all of its assets to the acquiring entity and go out of existence and the shareholders of the merged entity receive acquiring stock.
  • The article briefly describes the history of section 368(a)(1)(A), related regulations, and the proposed amendments. The article then examines some of the disparities created by the current rules and the benefits provided by the proposed amendments.
  • For additional information, contact Mark J. Silverman via email, Lisa M. Zarlenga via email, or John J. Giles via email.

Senate Budget Committee Tentatively Agrees to Approximately $70 Billion in Tax Cuts
Yesterday, the Senate Budget Committee reached a tentative agreement on approximately $70 billion for Fiscal Year 2006 that will cover the cost of extending expiring tax cuts. Budget Committee Chairman Judd Gregg (R-NH) said, "Nothing's final until it's final, but there is, I believe, a general agreement that we will have a reconciliation number that will cover the extenders that expire during the five-year window of this budget." The House Budget Committee has not reached an agreement on the amount of tax cuts in their budget resolution.

  • The President’s Fiscal Year 2006 budget proposes approximately $100 billion in tax cuts. Senate Budget Committee member Jon Kyl (R-AZ) added, "There are some things that are in the President's budget that are probably not going to be done by us."

Tax Bills Introduced March 7

  • H.R. 1134 sponsored by Rep. Mark Foley (R-FL) would provide for the proper tax treatment of certain disaster mitigation payments.
  • S. 534 sponsored by Sen. Russell Feingold (D-WI) would repeal the percentage depletion allowance for certain hardrock mines.
  • S. 542 sponsored by Sen. Byron Dorgan (D-ND) would extend for 5 years the credit for electricity produced from certain renewable resources, and for other purposes.
  • S. 543 sponsored by Sen. Olympia Snowe (R-ME) would expand the availability of the cash method of accounting for small businesses.

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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