Daily Tax Update - December 17, 2007

SENATE PASSES FARM BILL WITH ECONOMIC SUBSTANCE, SILO REVENUE OFFSETS:  On December 14, the Senate passed a $288 billion farm bill (H.R. 2419) that includes a $19 billion package of tax credits and other incentives aimed at encouraging alternative energy production and conservation initiatives. The House and Senate are expected to go to conference on the legislation; however, a final bill is not expected until January. The tax package is fully offset. Offsets include:

  • Clarification of the Economic Substance Doctrine and Penalty for Understatements Attributable to Transactions Lacking Economic Substance:  This proposal, added to the Chairman’s mark as an amendment, clarifies the application of the economic substance doctrine but does not change current-law standards used by courts in determining when to utilize an economic substance analysis. The proposal imposes a 30 percent penalty on understatements attributable to a non-economic substance transaction (unless the transaction was disclosed, in which case the penalty is 20 percent). Under the proposal, in any case in which a court determines that the economic substance doctrine is relevant to a transaction, the economic substance doctrine would be satisfied only if (1) the transaction changes in a meaningful way (apart from federal income tax consequences) the taxpayer’s economic position, and (2) the taxpayer has a substantial non-Federal tax purpose for entering into such transaction. The proposal becomes effective for transactions entered into after the date of enactment. This provision will provide $10.012 billion over ten years.
  • Denial of Deduction for Interest on Underpayments Attributable to Non-Economic Substance Transactions:  This proposal denies any deduction for interest on unpaid taxes attributable to any non-economic substance transaction understatement. This proposal becomes effectives for transactions entered into after the date of enactment. This provision will provide $43 million over ten years.
  • Sale-In/Sale-Out (SILO)—Foreign: The proposal disallows future losses on foreign tax exempt use property for leases entered into on or before March 12, 2004. This provision will provide $3.235 billion over ten years.
  • A summary of the bill can be accessed via:   http://finance.senate.gov/press/Bpress/2007press/prb121407b.pdf

SENATE RATIFIES BELGIAN TAX TREATY & PROTOCOL TO GERMAN PACT WITH MANDATORY ARBITRATION:  On December 14, the Senate approved a new tax treaty with Belgium and a new protocol to the US-Germany income tax accord. Each of the accords approved last Friday offers a coveted zero withholding rate on dividends and beneficial treatment of pensions, along with strengthened provisions to prevent abuse and facilitate the exchange of information.

  • Treasury spokesman Andrew DeSouza said, “The Treasury Department is very happy that the Senate has acted on the protocol with Germany and the treaty with Belgium before the end of the year. This protocol and treaty will continue our strong economic relationships with these two countries.”
  • For additional information, contact Philip R. West - pwest@steptoe.com or Stanley Smilack - ssmilack@steptoe.com

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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