Daily Tax Update - December 20, 2007


HOUSE APPROVES AMT PATCH – PRESIDENT EXPECTED TO SIGN BILL:  Before adjourning for the year, the House approved a Senate-passed bill (H.R. 3996) that would patch the alternative minimum tax without offsets. The bill passed by a 352-64 vote and is expected to be signed into law by President Bush. House Majority Leader Steny Hoyer (D-MD) said, “The only reason this bill is not paid for is because Republicans in lockstep . . . have precluded us from paying for this.”

  • The IRS announced that it would “immediately begin the final reprogramming steps for its income-tax processing systems to prepare for the upcoming tax season.” IRS Acting Commissioner Linda Stiff said, “Our people will do everything they can to quickly update our systems for this major change and make this filing season as smooth as possible for everyone. Our goal is to process tax returns accurately and to issue refunds to taxpayers as quickly as possible.” The IRS said that “revised copies of the 12 tax forms impacted by the AMT legislation will be posted to IRS.gov within 72 hours after the AMT patch is signed into law.”

Treasury and IRS Issue Temporary Regulations Addressing Foreign Tax Credit Issues:  Today, Treasury and the IRS issued temporary regulations under section 904 providing transition rules for the reduction in foreign tax credit limitation baskets. The IRS also issued temporary regulations under sections 904 and 1502 with guidance on the recapture of overall domestic losses, overall foreign losses, and separate limitation losses. Each set of temporary regulations serves as the text of proposed regulations also published today.

  • The temporary regulations governing transition to two baskets (passive and general) provide transition rules for the carryover and carryback of excess foreign taxes, recapture of overall foreign losses or separate limitation losses, and the treatment of earnings and profits and foreign income taxes of foreign corporations. These regulations also explain the new definitions of passive category income, passive income, and specified passive category income. These regulations are effective for taxable years of US taxpayers beginning after December 31, 2006 and ending on or after December 21, 2007, and for taxable years of foreign corporations ending with or within taxable years of their domestic corporate shareholders beginning after December 31, 2006 and ending on or after December 21, 2007.
  • In addition, temporary regulations were issued providing guidance regarding the establishment, maintenance, and recapture of overall domestic loss accounts as required by the enactment of the overall domestic loss rules. The regulations also provide guidance relating to foreign losses and separate limitation losses, including ordering rules for the coordination of losses. These regulations apply to taxable years beginning after December 21, 2007. They are electively retroactive to taxable years beginning after December 31, 2006, but taxpayers may use any reasonable method consistently applied for those years, including one based on the ordering rules of Notice 89-3.
  • Temporary regulations under section 1502 provide rules for the application of the section 904(g) overall domestic loss account regime to consolidated groups and their members. These regulations apply to consolidated return years beginning after December 21, 2007 and are electively retroactive to consolidated return years beginning after December 31, 2006.
  • For additional information, contact Philip R. West - pwest@steptoe.com or Stanley Smilack - ssmilack@steptoe.com
  • The regulations can be accessed here.

TREASURY RELEASES STUDY ON APPROACHES TO IMPROVE COMPETITIVENESS OF U.S. BUSINESS TAX SYSTEM:  Today, the Treasury Department released a comprehensive study addressing business taxation and global competitiveness.

  • Treasury Assistant Secretary for Tax Policy Eric Solomon said, “This report, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century, outlines several broad approaches to business tax reform. The study also outlines specific business tax areas that can be addressed. There are no policy recommendations in this study. We believe it will provide significant substance for discussion, and will further the effort to inform the public policy debate.” Solomon added, “To maintain the competitiveness of U.S. businesses and US workers in a global economy, an examination of our business tax system in the context of the global marketplace is overdue. As we continue our work on this important issue, we look forward to discussions with Congress, the business community, and other policy makers.”
  • The report can be accessed here.

CONGRESS APPROVES TAX TECHNICAL CORRECTIONS BILL:  Yesterday, the House and Senate passed legislation providing technical corrections to most of the major tax bills signed into law since 1998. The President is expected to sign the bill into law.

  • The technical corrections bill includes a provision to address changes to tax code Section 470. Section 470, which was enacted in the American Jobs Creation Act of 2004,  reduces certain tax benefits arising from SILO and LILO transactions by deferring deductions allocable to "tax-exempt use property." "Tax-exempt use property" generally has the meaning given to such term in section 168(h). Section 168(h) generally provides that only property leased to tax-exempt entities constitutes "tax-exempt use property." However, section 168(h)(6) contains a rule that significantly expands the definition of "tax-exempt use property" to include property of tax partnerships with certain common structural characteristics. This provision threatened to ensnare hosts of tax partnerships in the section 470 loss deferral web despite such partnerships having no connection to a SILO or LILO transaction. The technical corrections bill retroactively eliminates this threat for such partnerships. However, the technical corrections bill also inserts in section 470 a cross reference to section 7701(e) to prevent tax partnerships structured to produce tax results substantially similar to a SILO or LILO transaction from being excluded from section 470."
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Aaron P. Nocjaranocjar@steptoe.com
  • The bill also makes changes to clarify the application of the active trade or business requirement of section 355(b). The Tax Increase Prevention and Reconciliation Act of 2005 ("TIPRA") added section 355(b)(3), which provided that all members of a corporation's separate affiliated group will be treated as one corporation for purposes of the active trade or business requirement of section 355(b). The effective date of the TIPRA amendment was May 17, 2006. The Internal Revenue Service and Treasury published proposed regulations on May 8, 2007, which provide guidance regarding the active trade or business requirement of section 355(b), including the application of section 355(b)(3).
  • The bill clarifies that, if a corporation becomes a member of a separate affiliated group as a result of one or more transactions in which gain or loss is recognized in whole or in part, any trade or business conducted by such corporation (at the time that such corporation became such a member) is treated for purposes of section 355(b)(2) as acquired in a transaction in which gain or loss was recognized in whole or in part. Accordingly, an acquisition of the stock of a corporation that becomes a member of a separate affiliated group would be treated as an asset acquisition subject to section 355(b)(2)(C), but also as an asset acquisition that may qualify as an expansion of an existing trade or business. The treatment of a stock acquisition as an asset acquisition is consistent with the treatment provided for in the proposed regulations published on May 8, 2007.
  • The bill also clarifies that the Treasury Department shall provide regulations that properly apply sections 355(b)(2)(B), (C), (D), and (a)(3)(B) to corporations whose active business is tested under the separate affiliated group rule.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com
  • A description of the bill can be accessed here.

BILL APPROVED TO ALLOW NEXT IRS COMMISSIONER 5-YEAR TERM:  A bill that would allow the next IRS commissioner an immediate five-year term was approved by the House and Senate before they adjourned. The President is expected to sign the bill into law. Senate Finance Committee Chairman Max Baucus (D-MT) and ranking minority member Chuck Grassley (R-IA) cosponsored the bill (S. 2436), which would allow presidential nominee Douglas Shulman almost five years as IRS Commissioner if he is confirmed by the Senate.

H.R.4839: To amend the Internal Revenue Code of 1986 to make technical corrections, and for other purposes.
Sponsor: Rep Rangel, Charles B. [NY-15] (introduced 12/19/2007)      Cosponsors (None)

H.R.4840: To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.
Sponsor: Rep Kind, Ron [WI-3] (introduced 12/19/2007)      Cosponsors (6)

H.R.4845: To amend the Internal Revenue Code of 1986 to exclude overtime pay from gross income.
Sponsor: Rep Fallin, Mary [OK-5] (introduced 12/19/2007)      Cosponsors (11)

H.R.4912: To amend the Internal Revenue Code of 1986 with respect to the treatment of prepaid derivative contracts.
Sponsor: Rep Neal, Richard E. [MA-2] (introduced 12/19/2007)      Cosponsors (None)

S.2520: A bill to amend the Internal Revenue Code of 1986 to allow Indian tribal governments to transfer the credit for electricity produced from renewable resources.
Sponsor: Sen Johnson, Tim [SD] (introduced 12/19/2007)      Cosponsors (2)

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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