Daily Tax Update - December 11, 2007

HOUSE LAWMAKERS DISCUSSING PAIRING MEDICARE PACKAGE WITH AMT:  House lawmakers have been considering adding a Medicare package to an alternative minimum tax patch measure expected to be on the floor this week. However, Republican aides said a Medicare/AMT package would not pass in the Senate. Today, when asked whether he would be willing to send an AMT package to the White House that could be vetoed over Medicare, Finance Committee Chairman Max Baucus (D-MT) said, "I don't know. You have to cross that bridge when you get there."

  • The tax return filing season is scheduled to begin on January 14. The IRS's latest estimates predict that the agency would need seven weeks from the date AMT legislation is enacted to finish reprogramming its computer systems. An IRS spokesperson said yesterday that the IRS may have to delay starting the processing of tax returns for even those taxpayers not directly affected by the AMT. The IRS spokesperson said, “We are still trying to assess that.”

IRS ISSUES REVENUE RULING AND NOTICE ADDRESSING PREPAID FORWARD AND SIMILAR CONTRACTS:  On December 7, 2007, Treasury and the IRS issued a revenue ruling and a notice concerning prepaid forward and similar contracts. In general, prepaid forward contracts refer to a class of financial instruments under which the holder pays the issuer on the date of execution in exchange for either (i) the future delivery of a particular asset or group of assets or (ii) a future cash-settlement in an amount determined exclusively by reference to the value of such assets. Taxpayers have generally viewed a properly structured prepaid forward contract as providing for the deferral of income and expense until the date the contract is settled. The revenue ruling holds that a particular type of contract that may be characterized as a prepaid forward contract is to be treated as debt, and the notice states that Treasury and the Service are reviewing whether deferral in the broader context is appropriate.

  • In Rev. Rul. 2008-1, Treasury and the IRS characterized a particular prepaid forward contract as debt for tax purposes. The facts in Rev. Rul. 2008-1 involved a financial instrument that was issued and redeemed in US dollars, but that provided an economic return determined by reference to the euro and euro interest rates. The revenue ruling stated that the legal remedies provided in the instrument were not materially different than those associated with debt instruments. Treasury and the Service concluded that the instrument described in the ruling constituted debt for tax purposes, notwithstanding the fact that payments made in one currency were determined by reference to another currency, and that currency fluctuations could cause the holder to receive an amount in US dollars at maturity that is less than the original investment. The ruling clarified that the same result would obtain whether the instruments were (i) privately offered, (ii) publicly offered, or (iii) traded on an exchange. Characterization as debt would require the holder to recognize "interest" income over the term of the instrument at ordinary income tax rates.
  • In Notice 2008-2, Treasury and the IRS requested comments on the proper tax treatment of prepaid forward contracts that are not otherwise characterized as debt instruments (such as the instrument described in Rev. Rul. 2008-1). The comments requested by Treasury and the IRS relate to whether accrual of income and expense during the term of such prepaid forward contracts is appropriate, as well as numerous other issues associated with these contracts, including:
    • If an accrual regime is appropriate, the proper methodology to be adopted, the scope of the regime, the character of any income accruals, and whether the tax treatment should vary depending on the nature of the underlying asset and how the transactions are effected (e.g., executed on a futures exchange);
    • Whether the transactions should be treated as debt pursuant to regulations issued under section 7872;
    • Whether section 1260 applies or should apply;
    • Whether the withholding tax provisions of section 871 and 881 should apply;
    • How certain subpart F provisions should apply to income recognized with respect to prepaid forward contracts, and
    • Transition rules and effective dates.
  • Comments are requested by May 13, 2008.
  • For additional information, contact Philip R. West - pwest@steptoe.com
  • The revenue ruling & notice can be accessed via:

S. 2436 : A bill to amend the Internal Revenue Code of 1986 to clarify the term of the Commissioner of Internal Revenue.
Sponsor: Sen Baucus, Max [MT] (introduced 12/10/2007)      Cosponsors (1)

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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