Daily Tax Update - April 25, 2008

ECONOMIC STIMULUS REBATE CHECKS TO BE MAILED OUT STARTING MONDAY:  Beginning Monday, the Treasury Department will start delivering the first tax rebate checks by direct deposit. The next round of rebate checks will be mailed out on May 9th. By this summer, the Treasury Departments expects to have sent rebate checks ranging from $300 to $1200 to approximately 130 million households.

  • Today, President Bush said, “Obviously our economy is in a slowdown. . .We want to make sure everyone who's eligible for a check gets one on a timely basis. This money is going to help Americans offset the high prices we're seeing at the gas pump and at the grocery store, and it will also give our economy a boost to help us pull out of this economic slowdown. I'm pleased that the Treasury Department has worked quickly to get the money into the hands of the American people. Starting Monday, the effects of the stimulus will begin to reach millions of households across our country.”
  • Today, House Speaker Nancy Pelosi said, “American families need these rebates for the rising cost of gas and groceries, and this will help get the economy moving. These checks will not come a moment too soon for families struggling with the economic downturn–that they are a good, strong step. The strain of the economic downturn on middle- and low-income families demands, in my view, a consideration of a second stimulus package and we have begun some conversations with the Administration and the Republicans on that. Just as we did with the Recovery Rebates, Congress must work in a bipartisan way to find solutions for the immediate crisis and for a long-term economic recovery for America .” Pelosi added, “Specifically, we are working on efforts to pass additional sweeping legislation to keep millions of families in their homes, provide relief to millions of out-of-work Americans, and reduce the strain on families who are struggling with rising gas and grocery prices.”

COLORADO DISTRICT COURT FINDS FOR TAXPAYER IN SON-OF-BOSS CASE:  In Carlos E. Sala and Tina Zanolini-Sala v. United States, No. 05-cv-00636-LTB (D. Colo. Apr. 22, 2008), the court found that the foreign currency options investment transactions at issue possessed economic substance and were entered into for the purpose of realizing profits beyond tax losses. In addition, the court held that Treasury Regulation § 1.752-6 is invalid because it “not only alters prior law. . . it directly contradicts the underlying statutes. . .the abuse of which it supposedly prevents.”

  • As part of a series of transactions, the plaintiff contributed short options and long options to an S corporation, which in turn contributed those positions to a partnership. In computing the plaintiff’s basis in his S corporation interest and the S corporation's basis in its partnership interest, the plaintiff was permitted to include his basis in the long options (the premium he had paid) but was not required to reduce his basis by his liability to perform on the short options he contributed, because that liability was considered contingent. When the partnership terminated and the S corporation received assets from the partnership in distribution, the S corporation's high basis in its partnership interest transferred to the assets distributed, which were then sold at a loss which the plaintiff used to offset his 2000 tax liability. The government argued that the transactions lacked economic substance and should be combined under the step transaction doctrine. The government also argued that the long and short options should be treated as a single instrument with a net basis, and that the plaintiff lacked a profit motive. Judge Babcock disagreed on all counts. The judge found the plaintiff credible and believed that at the time that he entered into the transactions, the transactions could have achieved consistent and substantial profits, and that achieving such profits was a significant motivation for him. The judge was convinced that the steps taken by the plaintiff had a valid business purpose. Significantly, the court looked at the entire planned 5-year program of the investment and credited the plaintiff’s testimony that he was interested in a long term investment relationship with his advisor.  
  • The government also sought to rely upon Treasury Regulation § 1.752-6. This regulation was promulgated to stop this perceived abuse by directing that the assumption of the obligation to perform on contingent short term options reduce partnership basis as an assumption of liability. The judge found that the regulation was “an obvious effort to bootstrap the government’s litigation position with respect to so-called ‘Son of Boss’ cases.” The judge invalidated the regulation, finding it contrary to section 358(h), the code section under which Treasury issued the regulation. The judge also found that even if the regulation was valid it could not be applied retroactively. 
  • For additional information, contact Matthew D. Lerner - mlerner@steptoe.com 
  • The opinion can be accessed via: http://www.steptoe.com/attachment.html/3385.pdf

TAX BILLS INTRODUCED APRIL 24TH:
H.R.5905: To amend the Internal Revenue Code of 1986 to provide individuals a deduction for commuting expenses.
Sponsor: Rep Diaz-Balart, Mario [FL-25] (introduced 4/24/2008)      Cosponsors (7)  

H.R.5906: To amend the Internal Revenue Code of 1986 to allow the expensing of certain real property.
Sponsor: Rep Fossella, Vito [NY-13] (introduced 4/24/2008)      Cosponsors (2)  

H.R.5908: To amend the Internal Revenue Code of 1986 to provide a permanent zero percent capital gains rate for individuals and corporations.
Sponsor: Rep Herger, Wally [CA-2] (introduced 4/24/2008)      Cosponsors (7)  

STEPTOE & JOHNSON LLP’S RECENT TAX ARTICLES & PUBLICATIONS AVAILABLE:  A list of our recent tax publications and articles is available on Steptoe’s website via: http://www.steptoe.com/publications-area-4.html 

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
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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