Daily Tax Update - July 18, 2005

HIGHWAY REAUTHORIZATION EXTENSION EXPIRES TOMORROW:
House and Senate highway conferees will have to pass another short-term extension tomorrow in order to conclude their negotiations. The conferees are considering a bill of approximately $286.5 billion through fiscal year 2009. The reauthorization bill conferees are hopeful to conclude their negotiations this week.

TREASURY AND IRS PUBLISH FINAL REGULATIONS ON SOURCE OF COMPENSATION:
On July 13, Treasury and the IRS issued final regulations regarding how compensation for labor or personal services should be sourced for U.S. Federal income tax purposes. See T.D. 9212, 70 Fed. Reg. 40663-40669 (July 13, 2005). The final regulations generally retain the provisions of the proposed regulations issued on August 6, 2004.

  • Compensation (other than certain fringe benefits) paid to employees is generally sourced on a time basis; certain fringe benefits are sourced on a geographic basis. However, an employee is generally allowed to elect an alternative basis to determine the source of compensation (including certain fringe benefits) if the employee establishes to the satisfaction of the Commissioner that the alternative basis more properly determines the source of the compensation.
  • Compensation paid to service providers other than employees is generally sourced on a facts and circumstances basis.
  • The final regulations slightly expand the types of educational expenses that are treated as fringe benefits under the regulations.
  • These regulations apply to taxable years beginning on or after July 14, 2005.
  • For additional information, contact Philip R. West via email or John J. Giles via email.

TREASURY AND IRS PUBLISH FINAL REGULATIONS ON ALLOCATION AND APPORTIONMENT OF CHARITABLE DEDUCTIONS:
On July 13, Treasury and the IRS published final regulations on the allocation and apportionment of charitable contribution deductions allowed under sections 170, 873(b)(2), and 882(c)(1)(B) and the charitable contribution deduction allowed under an income tax treaty. See T.D. 9211, 70 Fed. Reg 40661-40663 (July 13, 2005). These regulations generally retain the provisions of proposed and temporary regulations that were issued on July 28, 2004. In general, the final regulations provide that charitable deductions are allocated and apportioned to U.S. source income. The final regulations also provide that charitable deductions allowed under a U.S. treaty (but not otherwise allowed under U.S. law) are to be allocated and apportioned between the statutory and residual groupings on the basis of the relative amounts of gross income from sources within the treaty partner in each grouping. The regulations are generally effective for taxable years beginning on or after July 28, 2004; however, the rule for charitable deductions allowed under the provision of a treaty is effective for taxable years beginning on or after July 14, 2005.

  • For additional information, contact Philip R. West via email or John J. Giles via email.
  • IRS ISSUES NOTICE OUTLINING CHANGES TO TREAS. REG. § 1.882-5 FOR NON-U.S. BANKS:
    On July 14, the IRS issued Notice 2005-53, relating to the treatment of banks under Treas. Reg. § 1.882-5, which generally requires a foreign corporation to determine the amount of interest expense allocable to income effectively connected with the foreign corporation’s U.S. trade or business. The matters covered in Notice 2005-53 include a request for comments on a suggestion that the IRS and Treasury may revise the fixed ratio (of liabilities to assets) from 93% to somewhere between 94% and 96%. Also, the notice clarifies that Treas. Reg. § 1.882-5 remains elective under the new U.K. and Japanese treaties, two recent U.S. tax treaties providing alternative interest allocation methods to banks with U.S. permanent establishments. The notice also states that the amended regulations will allow taxpayers who are eligible to use the adjusted U.S. book liabilities ("AUSBL") method to make a binding annual election to calculate excess interest under the AUSBL method by reference to the published 30-day average LIBOR rate for such year, rather than the actual foreign U.S. dollar borrowing rate prescribed in the current regulations. Finally, the notice solicits comments from taxpayers about linking the fixed ratio election with the fair market value election for determining the total value of U.S. assets of the foreign corporation.

    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