Daily Tax Update - December 28, 2007


IRS TO ISSUE REGS CLARIFYING HOW EXCEPTIONS TO COORDINATION RULE APPLY TO OUTBOUND REORGS AND SECTION 351 EXCHANGES:  Today, the IRS announced (Notice 2008-10) it will issue regulations under section 367(a) to clarify that some outbound reorganizations that effectively repatriate earnings of foreign corporations to US corporations will be subject to recognition of gain under section 367(a)(1).

  • The IRS and Treasury, seeking to curb transactions designed to avoid US income tax, state that some taxpayers are engaging in transactions intended to repatriate cash or other property from foreign subsidiaries without the recognition of gain or a dividend inclusion. Taxpayers take the position that, under reg. section 1.367(a)-3(d)(2)(vi)(B)(1)(i), a domestic corporation's transfer of property to a foreign corporation is not subject to section 367(a) or (d) because the basis adjustment requirement of section 367(a)(5) is satisfied if the US parent reduces by $100x its basis in the foreign corporation stock that it held prior to the transaction.
  • The IRS and Treasury plan to issue regs under section 367(a) to clarify how the two exceptions to the general coordination rule of reg. section 1.367(a)-3(d)(2)(vi)(B)(1)(i) are to be applied to section 368(a) outbound reorganizations and certain successive transfers to which section 351 applies. The regs described in the notice will apply to transactions occurring after December 27, 2007. The IRS and Treasury request comments on other transactions and structures that may be, or already have been, used to repatriate earnings of foreign corporations without the recognition of gain or a dividend inclusion. The IRS and Treasury also seek comments on more fundamental changes that might be made, including possible changes to the coordination rule.
  • The notice can be accessed via: http://www.steptoe.com/attachment.html/3280.pdf
  • For additional information, contact Philip R. West – pwest@steptoe.com

IRS, TREASURY ISSUE ADDITONAL PROPOSED REGULATIONS ON PENSION PROTECTION ACT FUNDING RULES: Today, the Treasury Department and the IRS issued proposed regulations that provide employers sponsoring single-employer defined benefit plans with guidance regarding the measurement of pension assets and liabilities under the new funding rules enacted as part of the Pension Protection Act of 2006.

  • According to the IRS, “These proposed regulations, together with proposed regulations related to mortality issued in May, proposed regulations relating to funding balances and funding-based benefit limitations issued in August, the yield curve guidance issued in October, and guidance on lump sum determinations issued in November will assist plan sponsors in determining the contribution requirements that apply to their defined benefit plans for the first year that the new funding rules apply. Although the new funding rules are generally effective for plan years beginning on or after January 1, 2008, these regulations are proposed to be effective for plan years beginning on or after January 1, 2009.  However, plan sponsors can rely on these proposed regulations for purposes of satisfying the requirements of section 430 for plan years beginning in 2008.” The IRS added, “The Treasury Department and the Internal Revenue Service intend to issue guidance in the near future indicating that the proposed effective date for these regulations should also apply for the proposed regulations relating to employer-specific mortality tables issued in May and the proposed regulations related to funding balances and funding based-benefit limitations under sections 430(f) and 436 issued in August. Although final regulations will not apply to plan years beginning before January 1, 2009, plan sponsors may also rely on those proposed regulations for purposes of satisfying the statutory requirements for plan years beginning in 2008.”
  • The regulations can be accessed via: http://www.steptoe.com/attachment.html/3279.pdf
  • For additional information, contact Anne E. Moran – amoran@steptoe.com, Ellen Kohnekohn@steptoe.com, or Don Wellington – dwellington@steptoe.com 

IRS SAYS FILING SEASON WILL OPEN ON TIME FOR MOST TAXPAYERS:  According to a news release issued December 27, the IRS said that the filing season will open on schedule for all but 13.5 million taxpayers. The IRS stated, “IRS processing delays caused by the last-minute passage of alternative minimum tax legislation will postpone the start of the filing season until February 11 only for an estimated 13.5 million taxpayers who use any of five specific credit forms. The February date allows the IRS enough time to update and test its systems to accommodate the AMT changes without major disruptions to other operations related to the tax season.”

  • Acting IRS Commissioner Linda Stiff said, “We regret the inconvenience the delay will mean for millions of early tax filers, especially those expecting a refund. We’ve taken extraordinary steps to figure out a way that we can start the filing season on time for most taxpayers, including some using AMT-related forms. Our goal has always been to make sure we can accurately process tax returns while getting refunds to taxpayers as quickly as possible.”

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.