Daily Tax Update - June 21, 2007

REVENUE RULING ISSUED ON ACTIVE TRADE REQUIREMENT FOR CORPORATIONS WITH LLC INTEREST: Today, the IRS issued Rev. Rul. 2007-42, concerning the active trade or business requirement under Internal Revenue Code Section 355(b).

  • The ruling addresses the issue of whether a corporation that owns a membership interest in a limited liability company’s rental business - classified as a partnership for Federal tax purposes - is engaged in the active conduct of a trade or business for purposes of section 355(b).
  • According to the ruling, the fact that a partnership engages in activities that would constitute the active conduct of a trade or business if conducted by a corporation does not necessarily mean that each partner in the partnership is considered to be engaged in the active conduct of a trade or business for purposes of section 355(b).  
  • The ruling states that in such a case, “the determination of whether a partner is considered to be engaged in the active conduct of a trade or business must be based on the requirements of section 355 and the regulations thereunder, taking into account the activities of the partner (if any), the partner's interest in the partnership, and the activities of the partnership.”
  • The IRS concluded that a corporation is engaged in the active conduct of a limited liability company's rental business for purposes of section 355(b) when the corporation owns a significant interest in the LLC, which performs the required activities that constitute an active trade or business under the applicable regulations.
  • For additional information, contact Mark J. Silverman or Lisa M. Zarlenga.
  • The revenue procedure can be accessed here.

TRANSFER PRICING DOCUMENTATION DEADLINE ON SEPTEMBER 15, 2007 FOR CALENDAR YEAR TAXPAYERS:  To avoid penalties, taxpayers should include appropriate documentation of their transfer pricing methodologies and results with their tax returns.  For calendar year taxpayers, this means that the documentation must be completed by September 15.  IRS agents have been instructed to look critically at this documentation, so companies may want to reconsider the standards they have used in the past for determining whether their documentation is rigorous and specific enough.  Steptoe's transfer pricing group is available and particularly well-situated to assist with that work.  Click here for more information. 

H.R. 2785: To amend the Internal Revenue Code of 1986 to provide that the exception from the treatment of publicly traded partnerships as corporations for partnerships with passive-type income shall not apply to partnerships directly or indirectly deriving income from providing investment adviser and related asset management services. Sponsor: Rep. Welch, Peter [VT] (introduced 6/20/2007)

H.R. 2796: To amend the Internal Revenue Code of 1986 to allow individuals to defer recognition of reinvested capital gains distributions from regulated investment companies. Sponsor: Rep. Ryan, Paul [WI-1] (introduced 6/20/2007)

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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