Daily Tax Update - January 9, 2007

NATIONAL TAXPAYER RELEASES ANNUAL REPORT— STRESSES NEED FOR ACTION ON AMT AND CLOSING TAX GAP:  Today, the National Taxpayer Advocate Nina Olson released her annual report to Congress, designating the alternative minimum tax for individuals (AMT) and the federal tax gap as the most serious problems facing taxpayers.  According to the report, “The AMT was designated as the most serious problem in the Advocate’s report both in its own right and because it symbolizes the broader problem of tax-law complexity.  The tax gap remains a high priority because noncompliance by some taxpayers requires every compliant taxpayer to pay, on average, more than $2,200 in extra tax each year to subsidize that noncompliance.”

  • Olson said, “With a new Congress convening, I am pleased to see these issues have been identified as priorities by the leadership of the House and Senate tax-writing committees. Simplifying the tax code, particularly by repealing the AMT, and reducing the inequities caused by the tax gap will go a long way to helping America’s taxpayers.”
  • Senate Finance Committee Chairman Max Baucus (D-MT) said, “The taxpayer advocate really hit the nail on the head.  The AMT surprises and snares middle-income taxpayers who were never meant to pay it.  It’s time to protect families from the higher burden of this hidden second tax system once and for all.  It’s a tall order to do this in fiscally responsible fashion, but that’s the job before us.”  Baucus has introduced legislation with Sen. Charles  Grassley (R-IA) in the 110th Congress to repeal the individual AMT.
  • Additional information can be accessed via: http://www.irs.gov/advocate/article/0,,id=165806,00.html

TREASURY, IRS MODIFY SUBSTANTIAL ASSISTANCE RULES: Today, the Treasury Department and IRS issued Notice 2007-13 announcing their intent to amend the regulations defining "substantial assistance" for purposes of the foreign base company services income rules.  Foreign base company services income is a category of subpart F income and includes income derived in connection with specific types of services that are performed for or on behalf of any related person and are performed outside the country under the laws of which the controlled foreign corporation is created or organized. Under Treasury regulations, services performed "for or on behalf of a related party" include services performed by a controlled foreign corporation in a case where "[substantial assistance contributing to the performance of such services has been furnished by a related person or persons." The notice indicates that future regulations will significantly limit the circumstances in which assistance in the form of "direction, supervision, services or know-how" will be considered "substantial" for purposes of applying this rule. Under current rules, such assistance is considered substantial if it is a "principal element" in producing the services income or if the cost of the assistance is 50 percent of the total cost of performing the services. Under the proposed guidance, the assistance must be from a related United States person or persons. In addition, there will no longer be a subjective "principal element" test to determine whether such assistance is substantial. To be substantial, the direction, supervision, services or know-how furnished by a related United States person must equal or exceed 80 percent of the total cost to the CFC of performing the services.

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.